Oracle's Purchase Of Sun To Re-Shape Industry

Oracle’s purchase of Sun Microsystems is expected to shake up the tech sector as it turns the software giant into a player in the hardware market and gives it new clout in software. The $ 7.1 billion deal, which Oracle reached after the collapse of Sun’s talks with International Business Machines, will make it the No 2 player in the $17 billion market for high-end Unix computers used in corporate data centres. That puts Oracle behind IBM and ahead of Hewlett Packard.

The acquisition also gives Oracle control of Sun’s Java software, one of the world’s most widely used computer languages, and the Solaris operating system for Unix servers. “This is a competitor that is much more formidable than Sun standing alone,” said Howard Anderson, a lecturer at the MIT Entrepreneurship Center and former CEO of the Yankee Group. “If I were a Sun customer, I was starting to get nervous about Sun. I was worried about their viability. I’m not worried about that anymore. I know that Oracle is going to be there.”

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Analysts say Oracle, known for its aggressive marketing and tight cost controls, will cut Sun’s bloated cost structure and energise a struggling company with 33,556 workers at the end of last year. Sun posted a loss of $1.9 billion in the first half of its current fiscal year. Sanford Bernstein analyst Toni Sacconaghi predicted that once Oracle takes over Sun, it will likely need to cut another 5,500 to 10,000 positions.

Product Bundling

Oracle’s goal is to boost sales of existing products as well as the ones it is acquiring by bundling its software with Sun’s hardware, selling pre-configured machines that it promises will cost less and perform better than rivals. “Across the board, this puts Oracle on much more of a competitive footing against IBM and HP. This puts them on an even footing from disk to databases, and everything in between,” said Laura DiDio, an analyst with research and consulting firm ITIC.

Oracle has forecast that the acquisition would add $1.5 billion to operating profit in the first full year after closing, and said it intends to make the hardware division profitable. Investors seemed to approve. But the risk is that it will be more difficult than Oracle anticipates to turn around Sun’s struggling hardware business. While Oracle chief executive Larry Ellison has a strong track record of integrating software companies into his business, he has yet to take on a hardware maker. “We view the deal as a stretch for Oracle,” said Sacconaghi of Sanford Bernstein.

Ellison’s vision of offering a full soup-to-nuts product line might resonate with some customers, but not all. The brash billionaire has previously bragged that his software will increasingly allow businesses to use inexpensive x86 computers to handle complex tasks that once required the use of Sun’s high-end Unix systems, Sacconaghi said. Dell competes with Sun in selling x86 servers, a $30 billion market where Sun has just a 2.5 percent share versus 22.3 percent for Dell, according to Gartner Research.

Rivalry with Microsoft

While there are questions about Oracle moving into the hardware business, the benefits of it buying Sun’s software units are clear. Ellison said Java would be the most important software asset he had acquired, after spending more than $30 billion on 54 companies. Both Oracle and IBM develop software using Java, which Sun licences out to most software makers. Java code is used in Web applications, as well as devices ranging from cellphones to PCs and servers, and it competes with a group of programming standards from Microsoft known as .Net.

While Java is not a growth business – revenue was flat in Sun’s most recent fiscal year at $220 million – Ellison will likely seek to use the clout that comes with controlling Java and setting industry standards as a weapon in his long-running battle with Microsoft. Under Oracle’s stewardship of Sun, Microsoft could also face more competition in the database market, where its SQL server competes with Sun’s mySQL software. Microsoft chief executive Steve Ballmer was he was ‘very surprised’ by the Sun-Oracle deal when asked about it while travelling in Moscow on Monday.

Defensive Move?

Some analysts said Oracle wants to buy Sun to boost revenue as it grapples with a recession and currency headwinds. New software sales fell 6 percent in its most recent quarter. Analysts, on average, expect Sun to post full-year revenue of $13 billion, more than half the $23 billion projected for Oracle, according to Reuters Estimates. “We think it is largely a defensive move to keep its positioning within the industry and to get some software assets at a fairly good price,” said Edward Jones analyst Andy Miedler. A spokeswoman for Hewlett-Packard said her company, a close partner of Oracle and Sun, will look to strengthen its ties with the larger Oracle.

IBM chief financial officer Mark Loughridge said on an earnings call on Monday, April 20, that the deal will have no impact on his business: “They now have the same address and the same mailbox but we are talking about the same team we have been competing against for some time and winning on the field.” (Reuters)