The news on Thursday that European Union antitrust regulators have launched an in-depth probe into Oracle’s $7.4 billion takeover of Sun Microsystems on competitive concerns was the worst outcome for the two firms as they are both left paralyzed for an indeterminate length of time.
The European Commission, the competition watchdog of the European Union, set a January 19, 2010 deadline for its decision, putting Oracle months behind its original plan for closing the deal.
In the meantime, Oracle (NASDAQ: ORCL) has an action plan for Sun (NASDAQ: JAVA) that it cannot put into motion, and Sun has no effective leadership to help defend its continued losses and defections of customers.
HP and especially IBM have been offering discounts and other incentives to steal away Sun customers since Oracle agreed to buy Sun in April. Between that, concerns about Oracle as the owner of Sun, and rumors Oracle would turn around and sell Sun’s hardware business, IBM and HP have not had to make a particularly hard sell.
“It certainly kills the value of it,” James Staten, senior analyst with Forrester, told InternetNews.com. “You just know that IBM, HP and Dell are frothing at the mouth. They’ve already stolen a significant chunk of their sales before the delay, now with this delay they are just going to go hog wild.”
Sun declined to comment, while Oracle only issued a statement acknowledging the EC investigation.
All because of MySQL
Sun walked away from a possible merger with IBM in April because it feared a protracted antitrust investigation by the U.S. Department of Justice, since the two firms were both in the hardware business. The DoJ signed off on the Oracle/Sun deal on August 20.
Now, the problem all stems from MySQL, an open source database worth about $300 million to Sun. For a giant like Oracle, that’s a small amount, but that’s what the EC is focused on in its investigation.
Scott Testa, professor of Business Administration at Cabrini College in Philadelphia, said that this kind of scrutiny really is not warranted.
“The acquisition of MySQL makes sense on the Oracle side because they’ve been losing some business to the open source market. So I can see where the EU says ‘hey, you’re acquiring a competitor that’s making in-roads to your space, we want to look more,’ but at the end of the day, it’s such a little part of the market it doesn’t make sense,” he told InternetNews.com.
Staten figures there will be a concession from Oracle to avoid dragging out the deal but thinks the EC is being short-sighted. “This is the problem that the EC and DoJ and any antitrust body doesn’t understand. They don’t know the market well enough. A big player taking out another big player in the same space does not make the market smaller. The market itself is more dynamic than that,” he said.
Oracle could kill off MySQL completely, and MySQL users would simply take the code, which is open source, and go their own way without Oracle, he said. If anything, they’d probably prefer it. There is already a MySQL code fork called Drizzle, insuring MySQL will live on.
Next page: Technological Darwinism
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Testa believes Oracle will keep MySQL. “Even though it’s a small piece of business, I think Oracle wants that MySQL business. They don’t want to have to sell it to someone. So it’s a weird thing. I guess I feel bad for Sun but that’s technological Darwinism. They stuck to Sparc and Solaris to the end of time. I feel bad but it is what it is,” he said.
Even though Sun hardware is taking the hits, Testa thinks the biggest value is, ironically enough, in Sun’s software assets. “Honestly, the most valuable assets at Sun are Java and MySQL, plus Solaris and some consulting stuff. But the hardware business? I don’t see a lot of value in that. The software stuff is where the value is,” he noted.
With the deal now dragging into the fifth month, it’s left Sun without a direction, not where you want to be with IBM and HP on your case.
“It’s tough because they were trying to close this deal fast,” said Staten. “Oracle’s already got an integration plan that’s in process. Sun’s sales team has said ‘let’s not worry about Q4 because we will be in someone else’s hands.’ I understand many Sun sales reps are working without a commission plan because they are waiting for one from Oracle.”
So Sun may have to take over and right the ship themselves if the deal does indeed drag on until January. Good luck getting them motivated, said Staten. Hardly anyone is doing their job these days, they are trying to find a new one.
“To a large degree, it’s almost too late. If I was told or got a glimpse of an org chart or heard rumors I’m not on the integration plan, why would I be motivated to do anything?” he said.
And then there’s Oracle. CEO Larry Ellison and his two wingmen, President Charles Phillips and CFO Safra Catz, can’t say anything publicly lest they kill confidence in themselves and their ability to make the deal work. But they better have a good answer come next month at the Oracle OpenWorld conference.
“I think there’s a fair amount of that panic internally at Oracle, but they are always the brave face,” said Staten. “The big question is what does [Ellison] say at OpenWorld? He and every single executive in Oracle will be facing these questions in the biggest forum possible because every single big customer will be there asking the same question. That will be uncomfortable times ten.”