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

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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 (s IBM), Sun Microsystems (s JAVA) says that it has entered into a definitive merger agreement with database and enterprise software giant Oracle (s ORCL). 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 (s csco) 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 (s MSFT) 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.”

78 Responses to “Our Full Analysis of the $7.4B Oracle-Sun Deal”

  1. Aaron from NJ

    Oracle is going to support MySQL. There are 2 key drivers.

    1) they own the database engine that MySQL uses & see the core install base of MySQL of millions of databases as a core customer base to be harvested as 10% of those will need a Oracle DB sometime in the future.

    2) MySQL gives Oracle a real MS Access like database & entry level SQL Server “like” that Oracle standard edition has never become in 15 years of pushing Oracle Personal edition to basic Oracle database

    I think the open source model is going to change as Oracle buys open source tool vendors and creates its own enterprise stack & open source stack. This is key in attacking the Microsoft space. Oracle goes after Microsoft with OpenSource & IBM with its Oracle Enterprise Stack. It will take 5-10 more mergers for them to pull this off but it makes sense.

    The key is OpenSource system management is weak as a stack play and Oracle can sell OEM & their future system mgmt. stack as a way to manage OpenSource. It gives them a way to sell 10-50k licenses of OEM for OpenSource over the next 5 years to Opensource buyers.

  2. Jeffrey Pugh

    Not sure where you got your statement about the Sun acquisition: “but the fact is that despite most of the MySQL team having quit…”. As the manager of the MySQL Engineering team, I can tell you that we have had less than 2% attrition in the year since Sun acquired MySQL, and our veteran engineers are still here at Sun continuing to release MySQL Server and associated products.

    • Michael

      Could you please give us your take on the possible impact to MySQL and OpenOffice as I note with interest you are likely the only qualified participant in this forum ?
      Any “clues” would be received with the greatest of interest.


  3. This is definitely a game changing move by Oracle. It basically puts them in the ring with all the major players!

    Java – IBM – I suspect they will both support java and milk consultancy from their products built on it

    MySQL – Oracle will milk consultancy on this one, and offer OracleDB to the bigger players. Nice way to get new customers as they grow

    OpenOffice – This puts them in direct competition with Microsoft.Every install of openoffice is one less install on Microsoft Office
    Servers – IBM and HP
    Solaris – Solaris bundled with OracleDB and a support package. Sybase must be wetting themselves already!

    The only areas I see them selling off is the server division if they could get a good price for it.

    I see Oracle making mucho mucho money from this deal, especially in the consultancy arena, where HP and IBM rule at the mo

  4. When the world is turning to cloud computing (AWS with S3 and EC2), why buy a server company (“the network is the computer”) as a software/data base company?

    Oracle has the policy of making you pay for any software.
    SUN had the policy of giving away free a lot of software.

    Is java still so powerful seen the ever increasing number of Ruby on Rails applications (37 Signals, Twitter, …)

  5. methinks Larry will next swallow Amazon if there will be problems with digesting Sun’s cloud

    ERP market is already well trimmed by Oracle purchases, so if cloud computing is next, Amazon is next. Google acquires small agressive startups to fill in the holes in its portfolio, but Oracle seems to buy biggest competitors first.

    Continuing this logic without fear to get ridiculously absurd, we’ll see that with Sun merger, Oracle gets SPARC+Solaris, and might think that Oracle is entering an OS market, so Apple is to be a next one swallowed.

    Nah, people, relax and enjoy the show “Darwin theory in application to IT”. Let’s just hope that none will get his Darwin prize as a result.

  6. PITA_OM

    Thanks for the updated post. Oracle got many DB and MySQL adds to it. You should visit MySQL UC tomorrow.
    BTW, your analysis have lot of flaws – ORCL can’t be IBM on services grounds. You though weave nice stories
    from multiple places and attract gossip mongers for various “What if scenarios”. So I admire you if not
    trust your analysis.

    This is a classic White Knight move in the M&A game. Nothing new here or surprising.
    IBM set the price for Sun. Oracle paid it. Consolidation is happening and you can
    collect more mongers for next few quarters.


  7. Lightway

    Startups use free MySQL because startups don’t make any money.

    When you want to do a light project, you go down to U-Haul (MySQL) and rent a truck to get the job done.

    When you want to do some heavy lifting, you call out the Department of Transportation. (Oracle).

    MySQL and Oracle should ideally complement each other, not compete.

    Oracle serves the high end and MySQL serves the low end. There’s no way I’d ever put an ERP system on MySQL, never.

    • No matter Oracle want it or not, MySQL will find the way out because the demand of an open, loyalty free, proven scalable, and light weight database for web is everywhere.

      Oracle better to be friendly to MySQL community. The best they can do is to make all Oracle’s software compatible or pre-integrated with MySQL. That increases the chance of MySQL user to migrate to Oracle when commercial support required.

      I think forks will happen. hope some tech giant such as Google can lead the fork.

      Anyway, MySQL is already open-sourced and no way to return proprietary. So don’t worry about its future. The only killer to MySQL is itself.

  8. Hello Om,

    I remember reading your post on why Cisco is a better fit than IBM. I thought that would be a distraction for what Cisco is good in doing. My pick was Oracle!

    I am wondering if Oracle declared reasons for the acquisition are the real ones. Normally in War the declared reasons while they might be true, they are not the core motivating force for engagement.

    True MySQL, Java, Solaris are vital pieces for the deal, but Sun’s Identity Management Suite is among the best 3 in the market. Sun not too long acquired Vaau The Role Engineering and Certification engine of its current IdM. Sun made also significant grounds in the alignment of its IdM offering on top of a solid repository stack the Sun Directory Enterprise Server on Solaris. Oracle snapped many companies in the IdM space has a solid lineup. IBM needed Sun because it lacked some key pieces in the IdM space primary among them the Role engineering capability and I personally believe that IBM needed the R&D power in Sun since IBM while it is a big player it is not the innovation powerhouse it once was.

    I wonder what Oracle would do to Sun’s Identity Management?

    Another aspect that Sun has worked hard on is in the SOA domain under a project codenamed Metro. This is a significant platform that will work with Java and .NET services as equal first class citizens with no interop blumping that used to cause integration complexity to grow exponentially.

    I have no doubt that Oracle would digest Sun, but it will be how Oracle normally digest its acquisitions, Not pretty!

    Last but not the least, This could be a sad day for the open source world and what it brings of fresh innovative ideas and compelling shifts in attitudes.

  9. Oracle will probably sell parts of the business like StorageTek to private equity and look to merge others like SPARC. It will slowly kill the app server that overlaps with BEA/other Oracle middleware and blend Seebeyond’s customers into their existing stack. In short, this is a brilliant acquisition that may pay for itself after dispositions and it really pokes IBM in the eye. IBM should have done this deal to keep it off the block.

  10. Andrew Henderson

    Oracle Corp will do just little enough development of MySQL that a fairly substantial fork will materialise. But enough that Oracle Corp’s MySQL has just about sufficient strength to counter the fork in the fork’s own markets.
    Customers will be dismayed at the lack of coherence and OracleDb will yet again be seen as the paragon of confidence. This strategy will work for Oracle Corp.

  11. Habib Ullah Khan

    The consolidation is not over yet. Cisco HP and IBM have enough cash to jostle for a better positioning. I find two things interesting:

    1. Even though acquisitions are easier in tough times will the regulators not force a MySQL sale?
    2. Sun culture and Oracle culture? Hoo boy!

  12. “Oracle obviously makes a lot of money on databases from its large enterprise customers, but hardly any startups I’m aware of actually purchase database software – they use free versions of mysql of course.”

    Well, uses Oracle. But, you’re right. They didn’t pay for it. They better hope Oracle doesn’t find out.

  13. Christian Gross

    Wow, web folks are MISSING THE POINT…

    Let’s go back in history shall we… Who was the quintessential .COM company? Who was behind most startups? Sun! Yes Sun was the company that startups went to when they needed hardware. Then the bubble burst and Sun went down with it.

    Sun never made it back! Open Source, and web startups are a distraction! They earn nothing, have no business model for companies like Oracle and hence are a distraction…

    If you say, “oh oh look at Twitter… ” Yes please let’s look at Twitter. No business model, no earnings, no income, just the model that Ellison wants to avoid.

    I am actually very tempted to buy stock in Oracle because Ellison has his head screwed on right.

    The reference to Apollo is actually incorrect since Ellison is not buying companies willy nilly. Ellison is buying companies that fit to his enterprise vision. Anything else is not important, and that is focus.

    • Habib Ullah Khan

      I agree with you. We once had a finance course in new ways of looking at earnings. I was astonished to note the financial discipline of Oracle and their maniacal focus on financial metrics. Their key indicators like return on working capital consistently went up.

      Anything that does not make money will not get funded. He will have his bets but within a shrewd niche.

      Behind the eccentricity and the acquisition overload people miss the fact that Oracle runs an incredibly tight ship financially and executes remarkably well under all conditions.

  14. this makes (market) sense. beyond technologies that will either flourish (java, virtualization/solaris) or wither (mySQL, Sparc SMCC) the deal means change for thousands of sun and some oracle employees. lives will change, livelihoods will be lost. ORCL can now reasonably claim to be a contender in cloudwars. mr. ellison may surprise everyone by taking on cisco rather than selling server part of SUN to them. whenever large markets are perturbed, there are opportunities for nimble movers. cisco may have thrown out the first strike in to the server game, oracle can compete if the market changes enough to permit them to compete w/ a complete product offering that goes from servers to App (db).

  15. how does it matter now ? Most of sun products are open sourced (java , netbeans , solaris , mysql etc , glassfish ) thank god !! …………frankly speaking I never liked anything that came out of sun ……specially in Java world ………..EJB , Netbeans etc ……..while open source community provides most stuff that is in real use …….apache jarkarta , eclipse etc ………who cares the crap about sun …………..i just hope java jdk development is taken care by some non profit organization apache harmony project …………….Bye Bye Sun …… over engineered piece of crap

  16. Karthik

    While I see the logic for buying Sun for its software, I don’t know how much of the hardware business they would want to hold on to. There must be a good chunk of business they can carve out and sell to some other company (say Cisco). It will be interesting to see how this pans out.

  17. If I’m the DOJ I’m looking at this deal with a watchful eye, but it really wouldn’t make that much sense to kill off MySQL. Oracle and MySQL service for a large part two different markets. Could you see Oracle running individual web blogs? Or MySQL running airplane scheduling databases? Still, who ever said big business thought long term as opposed to short term greed.

  18. Jim Callahan

    It seems to me the odd man out in the Oracle acquistion of Sun Germany’s ERP vendor SAP.

    SAP accounting software uses Java (Netweaver) and SAP needs a database;
    however “At SAP® TechEd ’07 event in Las Vegas, MySQL AB and SAP AG announced that sales and support of the MaxDB database will revert back to SAP.”

    Still SAP and Oracle are competitors in the accounting software market. SAP’s accounting systems compete with Oracle’s Peoplesoft and JD Edwards brands; especially when SAP ventures out of the Fortune 1000 market and competes for the accounting software business of small and medium businesses.

    Oracle and SAP are also competitors in the Customer Relationship Management (CRM) space.

    Jim Callahan
    Orlando, FL