April 20, 2009

Oracle and Sun, Sitting in a Tree, M-E-R-G-I-N-G

Oracle Corporation and Sun Microsystems announced that they have entered into a definitive agreement under which 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. Oracle stated its belief that 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. The Sun Microsystems’ BoD has unanimously approved the transaction, which is anticipated to close this summer, subject to Sun stockholder approval, certain regulatory approvals and customary closing conditions.

OK, so the proverbial other shoe has dropped. As we pondered a few days ago, they were two likely scenarios for Sun Microsystems’ future. It appears the Death by Acquisition is now the preferred outcome, at least according to the unanimous actions of Sun’s BoD.

Given the long established and well-regarded technical give and take of the two firms, Oracle’s proposed acquisition of Sun leads to the obvious conclusion that Solaris will unquestionably be the platform of choice for Oracle’s bevy of software assets. For current Oracle and Sun customers, this is good news as it elevates the Solaris platform to a premium position from an R&D and feature enhancement/customization perspective. In addition, Sun’s storage assets may become a more critical consideration for DBMS and related application design than they have been in the past.

Sun’s portfolio of open source applications and initiatives may offer some competitive differentiation and new opportunities in the database realm and perhaps to a lesser extent in other commercial application market segments. Perhaps having mySQL in the Oracle fold would draw attention toward open source DBMS for commercial users and might lay the path to a DBMS offering akin to IBM’s WebSphere Community Edition. While these are different product areas, the notion of community versions with an upgrade path to full fledged commercial applications would seem applicable in this context as well. Sun’s other open source assets including Java, OpenSolaris, and ZFS, amongst others would serve to bolster Oracle’s technical prowess while potentially expanding the scope if not reach of Oracle access within and outside of the enterprise. This also bodes well for Oracle Fusion Middleware, which is built upon Java.

Outside of the database and commercial applications space, the positive impact of this announcement is less clear. From a hardware perspective, Oracle’s lack of history as a hardware systems vendor may bring some pause to channel partners including SIs, as well as VARs and other resellers with an historically hardware focus. With control over a leading platform for its cash cow DBMS and commercial applications, will there be a temptation to focus the hardware business too narrowly on being a carrying case for the software as opposed to a viable standalone business? How will traditional partners such as EMC, IBM, HP, etc. react to Oracle now being in a position to compete with their hardware and related services businesses? In the short term, none of this should present an issue, but over time, the potential synergies of Oracle + Sun could provoke consternation from important business partners. These challenges will need to be very carefully considered lest an important channel be harmed.

Since Sun contracts out much of its manufacturing, Oracle could easily continue this modus operandi, and not assume the potential long-term issues of investing in or shutting down aging manufacturing plant. This is a plus for Oracle, but it does remove one impediment that would otherwise justify the continued operation of certain hardware based product lines whose capital equipment cost has not fully depreciated. Nevertheless, in the short term we do not envision Oracle suddenly idling Sun’s substantial hardware business, but the long term synergies and strategies of the combined company may look rather different from that a traditional hardware systems vendor.

With this acquisition, Oracle could start looking similar to a version of Big Blue from a couple of decades ago, i.e. a vendor that provided a complete vertically integrated package of server hardware, storage, operating system, middleware, commercial applications, and services. Will this combination meet with marketplace acceptance, or skepticism? Does the one stop shop with a comprehensive single vendor solution meet the expectations of the best of breed, open source, heterogeneous marketplace of the 21st century? Will customers perceive a bias in the support and R&D of Oracle products that favors Sun’s underlying technology? How will Oracle assuage fears of customers that Oracle’s improved efficiency and cohesion in delivering technology will not also result in Oracle more efficiently commanding a greater share of its customer’s IT spend while reducing choice? All of these are mighty questions with a potentially significant impact on the IT marketplace in general, and Oracle’s bottom line in specific.

Big Blue taught the industry a key lesson about being a systems vendor a few years ago, namely leave some space on the playground for everyone. With IBM, HP, EMC, Fujitsu, and the rest, there are opportunities for hardware and software vendors to collaborate, compete, and co-exist. Under a combined Oracle/Sun, there may be less space in the playground, at least for Oracle customers. To our way of thinking, this would not be good for industry, nor Oracle in the long term. If this acquisition were ultimately given regulatory approval, it would be in everyone’s best interest to keep a watchful eye on Oracle’s behavior. This merger is systemically different from Oracle’s past software only acquisition, and as such has the potential to disrupt the value proposition of hardware in many segments of the IT marketplace.

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