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Sun Facing Massive Cuts After Oracle Deal?

IBM Officials introduce Project X

Oracle may cut up to half of Sun Microsystems' staff in the next few weeks when it finally closes the long-delayed acquisition of the troubled systems vendor, according to a report by an analyst at UBS AG.

Internally, Sun has denied the report, telling employees it is "absolutely untrue."

But sources close to the merger have said that significant layoffs are all but a given once the deal closes.

Such cuts are not unexpected. Given the usual overlap when two large firms merge, plus the view that Sun had way too many "science projects" and efforts that yielded no income, such layoffs were a given. The scope, however, was not.

Brent Thill, an analyst with UBS, said Oracle (NASDAQ: ORCL) is poised to put 13,800 Sun (NASDAQ: JAVA) employees on the street in the next few weeks in order to wring any profitability out of the firm. Sun employed almost 27,600 in September, according to the latest SEC filings.

All that stands in the way of closing the deal is European Union approval, which now seems likely. The deadline for approval is Jan. 27, although one source told InternetNews.com that the approval could come next week, on Jan. 19.

Such cuts would be necessary in order for Oracle to achieve the $1.5 billion it is seeking in non-GAAP operating income in the first full year after the close of the acquisition, Thill wrote in a research note.

Spokespeople for both Oracle and Sun declined to comment on rumor and speculation.

However, not long after the report came out, a Sun executive issued an internal memo denying the allegations. In the memo, which InternetNews.com has obtained, Brian Sutphin, executive vice president for corporate development and alliances at Sun, disputed the UBS report, reassuring employees that it was not based on any information provided by Oracle."

Sutphin added "Oracle is acquiring Sun to do something it cannot do alone -- deliver complete, integrated systems. Oracle will need to rely heavily on the talents of Sun employees to achieve this vision."

Last month, InternetNews.com learned that deep cuts were expected at Sun, including in its open source efforts, and many people had already been informed their services were no longer required starting in the new year. Sun declined to comment at that time as well.

Tough road ahead

Cuts aside, Thill noted that Oracle would have its work cut out for it trying to revitalize Sun.

"While Oracle has an excellent track record with M&A, successfully absorbing 60+ companies worth over $28 billion, we believe Sun could be its toughest challenge yet. Difficult issues include: high mix of hardware revs, shrinking revs, low margins, and potential channel conflict with long-time partners HP & Dell," he wrote.

Thill notes that Oracle has its work cut out for it trying to hit its profit targets following the Sun acquisition. The last time Sun had a pro forma operating margin greater than 10 percent was in fiscal 2001. In the last reported quarter ending September '09, Sun's pro forma operating margin was just 2 percent.

"In order to hit Oracle's goal of $1.5 billion in operating income, we estimate that revenue growth needs to be no worse than a 10 percent decline vs. FY09 and pro forma operating margin around 15 percent," Thill wrote.

Sun's revenue base may also be lower, since Oracle plans to "de-emphasize the low-end server market and the high-volume/low-margin x64 servers" Sun has rolled out in recent years. On the plus side, Thill noted that that strategy "may resolve some potential conflicts with Oracle's existing channel partners."

He also laid out a best and worst case scenario. In the best case scenario, revenue would be flat from fiscal '09 at $11.45 billion and pro forma Oracle would reap net income of $2.3 billion through the cuts.

The worst case is a 25 percent revenue drop with a 10 percent operating margin, "which may be generous given historical levels." Pro forma net income of $860 million would be well below what Oracle promised, but with the cost cutting, it could still contribute nicely to Oracle's bottom line.

Andy Patrizio is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.