EU May Delay Oracle-Sun Nuptials

IBM must be rubbing its hands in glee.

Oracle’s proposed $7.4 billion purchase of Sun Microsystems may have hit yet another snag, giving Big Blue still more time to continue picking apart Sun’s once-unswervingly loyal customer base.

The latest bump in the road comes from the European Commission (EC), which currently has one more day to approve or delay the proposed merger but which now could be leaning toward a delay, according to a Reuters report.

Citing two sources familiar with the situation, Reuters said that the EC’s antitrust concern centers around Oracle getting its hands on Sun’s MySQL database. U.S. antitrust officials, who earlier signed off on the deal, made no such concerns about MySQL.

If the commission decides to open an in-depth investigation of the matter, such a review could take as long as four months, according to commission rules.

This is absolutely the last thing Sun (NASDAQ: JAVA) needs as it loses talent and customers. IBM, HP and Dell are all pulling away customers with both hands, as fast as they can. IBM in particular has been quite aggressive in stealing Sun customers, and claiming that Sun customers and ISVs are approaching it for help jumping ship.

“This is painful to watch,” said Nathan Brookwood, a research fellow with Insight 64. “It is a shame. Every day that this thing gets delayed is another day for the aggressive sales forces from IBM, Dell and HP to pry away another Sun hardware customer, and it’s truly tragic.”

The report comes on the heels of a slower-than-hoped approval by the U.S. Department of Justice. The companies had hope that getting DoJ approval would be a relatively speedy affair but the new DoJ cast a close eye on everything.

Worries about DoJ scrutiny had already scuttled merger talks between Sun and IBM earlier this year: According to reports, IBM had been concerned about facing an antitrust fight in connection with the merger and wouldn’t give Sun assurances that it would stick it out.

Now, in addition to seeing customers and talent being plucked by rivals as it waits for European antitrust officials to clear the deal, Sun is also seeing its bottom line taking a hit. For the second quarter, the company reported a $147 million loss, or 20 cents per share, as sales fell 31 percent year-over-year to $2.63 billion.

Hardware sales are taking it particularly hard, and that’s Sun’s bread and butter. In its most recent estimates, industry analyst firm IDC put Sun’s Q2 server sales at $981 million while Gartner put the figure at $1.04 billion. That’s a steep drop off from the days of averaging around $3 billion in revenue per quarter.

Meanwhile, Sun can’t say a word as the acquired party, and Oracle — whose spokespeople didn’t return requests for comment by press time — has said very little.

Oracle has insisted it will maintain the hardware business, but Fortune recently ran a story saying Oracle wanted to shunt off the hardware business to HP — a report that isn’t likely to do much to retain customers or create certainty in their minds.

“I would think to be inside the walls at Sun right now is nightmare, because you don’t have any direction. I gather other prospects wouldn’t want to touch them right now,” Josh Farina, analyst at Technology Business Research, told “I would guess morale has got to be terrible because they don’t know what’s happening, and from a customer standpoint, there’s no clear sign of what’s going to happen.”

He added that Sun executives aren’t focused on long-term direction anymore since they are no longer in control of the company, and pointed out that it’s widely discussed that CEO Jonathan Schwartz will get a year’s salary as severance when the deal closes.

“There’s very little guidance from the top,” Farina said.

Insight 64’s Brookwood agreed that the likely reason for the EU’s delay had been around MySQL. But he said that for so small a piece of the pie — MySQL accounts for around $300 million in business while Oracle is a $25 billion company — European regulators’ concerns would be overblown.

“That’s a small portion of the acquisition but it is killing the hardware portion,” he said.

Brookwood added that he’s now starting to doubt Oracle will be able to save Sun’s hardware business.

“ISVs were more than willing to work with Sun because they saw Sun as a neutral hardware platform,” he said. “But when the Sun platform becomes part of Oracle, and Oracle has a reputation for acquiring companies and replacing the products with Oracle products, then ISVs get nervous. You don’t need to be a rocket scientist to figure that out.”

But Farina, at Technology Business Research, said he thinks something might be salvageable.

“If they can still close the acquisition and at least maintain whatever customers they have, they still get a good revenue stream off maintenance services, which gives them good margin,” he said. “If they can maintain that and get some concrete direction on that part of the business for the future, they have the potential to maybe break even on the hardware and get that services business, which is pretty attractive to pick up.”

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