Oracle Buys Sun in IBM’s Wake

Oracle buys Sun

Oracle and Sun Microsystems are poised to tie the knot after Oracle this morning said it’s making a $9.50 per share offer in cash for the embattled server and Java player.

The total price of the deal will be approximately $7.4 billion, but since Sun (NASDAQ:JAVA) brings $1.8 billion of net cash to the deal, the net cost to Oracle (NASDAQ: ORCL) could be as low as $5.6 billion.

The news comes almost exactly a month after IBM reportedly made its own offer for Sun, in a deal from which Sun ultimately walked away. The Wall Journal reported that Sun officials felt that IBM’s offer of $9.40 per share had been too low.

On a conference call announcing the deal this morning, Oracle president Safra Catz was bullish on the deal, saying that it would provide a greater per-share contribution than Oracle’s acquisitions of BEA, PeopleSoft and Siebel combined.

Sun certainly brings valuable assets to the table: open source products such as MySQL, the Solaris OS, and the Java language that gives Sun its NASDAQ stock symbol; as well as its core hardware business.

Oracle CEO Larry Ellison said that Sun’s Java and Unix environments make it a leader. “One of the reasons Oracle is so successful is that we buy companies that are No. 1,” he said in a statement.

During a conference call to discuss the merger, Scott McNealy, Sun’s chairman, said the news marked a “truly momentous day for the industry, one in which two titans are joining forces to deliver the market’s only completely integrated and open system in which customers can celebrate a new era of integration and innovation in the technology that drives our business forward.”

“We’re thrilled to be acquired by Oracle and have our technologies, innovations and communities as part of the Oracle vision,” McNealy added.

The acquisition will allow Oracle to combine enterprise hardware and software into a total solution, it said. “Oracle will be the only company that can engineer an integrated system — applications to disk — where all the pieces fit and work together so customers do not have to do it themselves,” Ellison said. “Our customers benefit as their systems integration costs go down while system performance, reliability and security go up.”

The deal is expected to close this summer, pending approval by regulators and by Sun’s shareholders and board.

Oracle takes Java, Solaris

During a conference call today discussing the acquisition, Oracle CEO Larry Ellison said the move aimed to give Oracle control of Java and Sun’s Solaris operating system.

While Java has made inroads onto PCs, mobile devices and even consumer electronics, Ellison said Oracle was most interested in the technology because of its role in enabling Oracle’s Fusion middleware offerings.

That product line has become increasingly important to Oracle in recent years: Ellison said it’s now Oracle’s fastest-growing business, and “is on track to be as large as our multibillion-dollar database business.”

“Java is the foundation of Oracle’s Fusion middleware and the single most important software asset we have ever acquired,” he said. “As a result of this acquisition, Oracle can increase the investment in Java technology that is so critical to our continued success in middleware and our next generation of Fusion applications.”

At the same time, Oracle is looking ahead to greater efficiencies and improvements that can result by packaging its flagship database with Sun SPARC Solaris servers, which are Sun’s largest business.

“We will be able to tightly integrate the Oracle database into some of the unique, high-end features of Solaris,” Ellison said. “Engineering the Oracle database and Solaris operating system to work together enables us, for the first time, to deliver complete and integrated computer systems, database to disk, optimized for high performance, improved reliability, enhanced security, easier management and a lower total cost of ownership.”

“In our opinion, Sun’s Solaris operating system is by far the best Unix technology available in the market,” Ellison added. “That explains why more Oracle databases run on the Sun SPARC Solaris platform than on any other computer system.”

Open source software also will be a keystone of the acquisition, executives said.

“This transaction also positions Oracle as the world’s largest supplier of open source software, with technology brands known by students, startups and developers across the world from Java and Open Solaris to MySQL and Open Office,” said Jonathan Schwartz, Sun’s CEO and president, during the call.

Shoring up Sun

However, Oracle may have its hands full in ensuring it can turn a profit from Sun, which has been struggling to effect a turnaround for some time despite some promising signs in its most recent quarter. In January, Sun reported a loss of $209 million — a marked improvement but still a far cry from profits a year earlier.

[cob:Special_Report]Still, executives at Oracle are optimistic about the purchase.

“We believe we will be able to run Sun at substantially higher margins,” Catz said during the conference call. “By utilizing Oracle’s scale, we can deliver substantial operating efficiencies far in excess of what Sun has done to date … We intend it to ensure that it is a profitable operating unit within Oracle.”

She added that Oracle expects the addition to Sun to add at least $1.5 billion in additional annual operating income.

“We believe the acquisition will be at least 15 cents accretive in the first full year on a non-GAAP basis, making this deal more profitable in per share contribution in the first year than we had planned for the acquisitions of PeopleSoft, Siebel and BEA combined,” she said.

Added Ellison, “We believe the best way to grow Oracle’s overall business is for us to deliver a broader range of products and services to our existing set of commercial and government customers. With the acquisition of Sun, Oracle is now able to make all of the pieces of the technology stack fit together and work well: Storage, computers, operating system, database, middleware and applications.”

The vision is ambitious, Sun officials said.

“There is no question in my mind that this transaction redefines the industry, redrawing the boundaries that have frustrated the industry’s ability to solve the problems that customers desperately seek to solve, eliminating the costs, complexities and inefficiencies that result from an industry focused on components rather than systems,” Schwartz said. “The combined Oracle and Sun will be exactly that, a systems and software powerhouse.”

Ray Wang, principal analyst at Forrester Research, told that he’s optimistic about the deal. “Oracle has done a good job of integrating large acquisitions in the past,” he said.

To him, the most interesting aspect of the deal has to do with open source. “It puts the stewardship of open source components into the hands of Oracle,” he said. “It could mean that Oracle accelerates its use of open source stacks.”

For example, he noted, Oracle’s flagship database product already leverages Java. As for Sun’s Solaris operating system, Oracle has been focusing on Linux and could now offer better support for Solaris.

Update adds comments from Wang, McNealy and Schwartz.

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