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.

April 06, 2009

No Sun in the Big Blue sky

OK, so IBM is backing away from Sun after the latest round of negotiations. While there has been much speculation about the sale price and just how much CYA IBM would be willing to afford the Copernican Company, as of now, the deal has fallen apart.

So, where does this leave Sun, and more importantly its customers? Since SGI went down a few days ago for a mere $25 million, one could reasonably ask, "Is this the same trajectory for Sun?" While it is clear, to our way of thinking that Sun is in a weaker position now than before the talk of merger began, the question now shifts to the likely long-term outcome for the company.

From our perspective, there are two likely scenarios for Sun, as we know it today: 1) Death by Acquisition, and 2) Death by a Thousand Cuts.

Under Death by Acquisition, Sun would ultimately be dismantled, but with a varying degree of strategy. The big potential suitors would fall into the "the other system vendors" camp. i.e. HP, Cisco, EMC, Oracle, etc. or a VC/fund/private equity investor type of buyer. With the Big Blue out of the picture, neither camp would seem to want to purchase and maintain a Sun as we know it. Instead they would be interested in running the company through a chop shop and part out to the desired parts to the highest bidder (some of which might be the buyer itself), with the rest going to the IT equivalent of the scrap pile.

From a customer perspective, it seems that HP ownership of Sun would guarantee an outcome similar to that experienced by DEC customers, i.e. loss of the platform, followed by a lukewarm embrace if the customer would dain to port to Itanic. Customers never like forced ports. Granted, HP has expertise in supporting Solaris and Java environments and their services folks, like all good services folks, ultimately deliver and support whatever equipment the customer demands. However, with control over the platform choices at the point of origination, this could change.

If an EMC, Oracle, Cisco, etc. were to acquire Sun, the customer base faces some more interesting, and upsetting challenges. None of these companies has the systems-wide perspective of Sun and while EMC might some more interesting storage solutions as a result and Oracle might optimize further around its DBMS, the clear compelling value for existing customers seems somewhat elusive.

If a financial interest would to acquire Sun, then again it's a path to the chop shop. While taking over declining companies was fashionable a few years back, the thought of bought out or refinanced companies rising to their former greatness is distracted by the realities of Chrysler, SGI, etc. Thus, a fast parting out of Sun's unique might be a quick financial fix; it would be a sad loss of an innovator and cohesive IT supplier with a vision for the future.

Under Death by a Thousand Cuts, Sun continues as an independent systems vendor, but one that is not on a recovery path. The prognosis is terminal, but the patient gets to live in its own home, and in a varying state of denial that the virile life of the past is destined to remain in the past. Sun's customers would not immediately be harmed or dislocated, but over time, the inevitable loss of key channel partners, employees, and customers would slowly bleed the company to the point where it could no longer effectively support and invest in itself. Then at some point, an attempted fire sale occurs and the company ends up in the chop shop or worse yet, simply fades away and is quietly subsumed a la SGI.

To our way of thinking, either of these scenarios is less desirable than Sun having become part of Big Blue. The impact on customers from IBM would be more gradual, the services organization would have little issue in maintaining and supplementing existing installations, and while SPARC would probably be put out to pasture at some point, POWER seems infinitely palatable to Itanic as a platform alternative.

The failure to complete this merger illustrates an all too common, yet unfortunate, reality that plagues companies that still have their founders involved in some fashion. Reports have indicated that Scott McNealy led the faction protesting the IBM deal. This brings to mind another failed merger, namely Yahoo!, which failed largely due to the actions and objections of founder Jerry Yang. Founders too often have an emotional attachment to "their baby" that can cloud judgment, especially when dealing in adverse economic environments. Did Yahoo! fare better by following Yang’s lead and refusing to sell to Microsoft? Obviously not. Will Sun? Probably not.

Despite all of this, I still have a lot of respect for Scott McNealy, and Sun Microsystems. He and they played an important role in the valley during last few decades, and we are all better off for it. I still think of McNealy as a very funny fellow, one whom I would have liked to see guest host Late Night or the Tonight Show, and a very knowledgeable force in the IT market. Nevertheless, the reality of 2009 seems to dictate that a midsized systems vendor would be relegated to RC Cola status in a world dominated by Coke and Pepsi. Eventually the big two will subsume most of the shelf space with the "store brand" (read white box) filling out the rest.

While there may be a magic trick or two left in Sun's collective hat, it doesn't seem obvious to the outsider. Whatever deal might be forged by Sun with other potential suitors is going to be tarnished by the failure of this one. Hence, a maligned $9.40 deal might ultimately be replaced with a $7, $6, or even $5 deal. It's just hard to see a different scenario.

All in all, it's just too bad. In fact, it's a damn shame. Old cowboys don't die; they just ride off into the sunset. It's just too bad that it may be the Sun set that may ultimately ride off.