Our Full Analysis of the $7.4B Oracle-Sun Deal


Oracle Campus in San Francisco Bay Area, Calif. Photo via Flickr by Steve Jurvetson

Updated: Less than a month after it walked away from a $7 billion deal with IBM, Sun Microsystems says that it has entered into a definitive merger agreement with database and enterprise software giant Oracle. Oracle will acquire Sun common stock for $9.50 per share in cash. The transaction is valued at approximately $7.4 billion, or $5.6 billion net of Sun’s cash and debt. It’s been approved by Sun’s board of directors.

Well if not IBM, someone was going to buy Sun, for the company was being actively shopped around to buyers. I thought Cisco should buy Sun, and so did 66 percent of 1,120 of our readers who took part in an online poll. At this price, it looks like Oracle found itself yet another bargain and in one fell swoop became a worthy competitor to IBM. It allows Oracle to become a player in the cloud computing business. More importantly, the company ends up acquiring MySQL, the upstart database that has been viewed as Oracle’s Achilles’ heel. In one fell swoop, it has taken out its No. 1 competitor. Oracle says that this acquisition is to be accretive to its earnings by at least 15 cents on a non-GAAP basis in the first full year after closing.The acquired business will contribute over $1.5 billion to Oracle’s non-GAAP operating profit in the first year, increasing to over $2 billion in the second year. “This would make the Sun acquisition more profitable in per-share contribution in the first year than we had planned for the acquisitions of BEA, PeopleSoft and Siebel combined,” said Oracle President Safra Catz in a statement.

“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,” said Oracle CEO Larry Ellison. Loose translation: IBM, you’d better watch out. Oracle now has the same kind of hardware and software capabilities, including providing large storage and computing clusters, that make IBM a fearsome player in the corporate arena.

Oracle touts the advantages of owning Java and Solaris in this press release, but mentions nothing of the real jewel in the crown: MySQL. The $1 billion acquisition has been a point of contention for Sun’s detractors, but the fact is that despite most of the MySQL team having quit, the little upstart database keeps on growing and growing. Oracle also gets some virtualization technologies with the Sun buy. Still, if you’re an open source enthusiast, you have to worry about this deal’s impact on open-source projects such as Open Office and MySQL. Oracle is known to squeeze its acquisitions for every single penny.

Update with views on MySQL: I am surprised by the lack of any mention of open source or MySQL, two of current CEO Jonathan Schwartz’s biggest corporate mantras, in the press release. MySQL is clearly a big prize for Oracle. Oracle’s products find no room in most of the new web companies — most preferring either MySQL or other open-source offerings. On the high end as well, Oracle has been competing with the MySQL Cluster offering. In addition, several startups have started to develop a new kind of data-store ecosystem based on MySQL, which is competitive with Oracle’s database offerings. In short, Oracle has taken out its No. 1 threat by buying Sun.

The deal is very likely going to result in exits from the MySQL team and cause some sort of a disruption. If I were Oracle, I would be paying a lot more attention to the MySQL team. Why? Because they have developers — many of them focused on developing things for the cloud and web services. These developers are the best way to keep Microsoft at bay as well.

Update: Since publishing the original post, I’ve been in touch with some of the folks who are especially well-versed in the ways of Oracle and Sun. Here are some highlights and questions from my conversations:

* The deal could mean trouble for Sybase, which has a lot of customers on Solaris.
* It could prove challenging for non-database users of Solaris, for it’s not clear how Oracle will treat Solaris.
* It’s good news for Java, as two major corporate giants will be supporting it and will be forced to play nice with each other.
* Oracle will keep MySQL going mostly because it can act as a funnel for further business opportunities.

Miko Matsumura, VP and deputy CTO at Software AG, has a contrarian take on the merger. He predicts it will be a disaster, with thousands of layoffs. He is right about the layoffs; President Safra Catz was pretty explicit in saying that Sun’s hardware business will be profitable, where one could expect the research team to be slashed along with other products.

On the Oracle side of things, one does wonder how will they digest this deal, which is definitely more complex than, say, PeopleSoft or BEA Systems. As Matsumura said to me in an email, “The boldness of this play suggests to me that Larry and Chuck Phillips believe that it’s going to get worse before it gets better. This is a cost-synergy play where Oracle burns most of the cost out of Sun and scoops up some of the dwindling revenue in the form of margins.”

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