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After IBM dalliance, Sun goes to Oracle for $7.4b
(Agencies)
Updated: 2009-04-21 11:49 Forrester Research analyst Ray Wang thinks Oracle could keep MySQL to put pricing pressure on Microsoft, a longtime Oracle nemesis that sells a less expensive database product. "With the acquisition of Sun, Oracle is now able to make all of the pieces of the technology stack fit together and work well," Oracle Chief Executive Larry Ellison said during a Monday conference call. But unlike IBM, Oracle is a surprising suitor because it doesn't make hardware. Although Sun wouldn't be Oracle's biggest acquisition during a four-year shopping spree that has cost about $40 billion, it may be the boldest. Some analysts suspect Oracle might try to sell Sun's hardware divisions if they turn out to be a drag. "This is a really strange deal to me — Oracle buying all this hardware, I wonder what they're going to do with it all," said Jane Snorek, an analyst with First American Funds. "I don't know what to think, frankly. It seems everyone wants to be IBM and have a mix. If it wasn't the for the fact that Oracle is such a good acquirer, I'd be negative" about the deal. Oracle shares sank 24 cents, 1.3 percent, to close at $18.82 in trading Monday. Sun shares jumped $2.46, 37 percent, to $9.15. Oracle's offer — which is valued at $5.6 billion when Sun's cash and debt are taken into account — amounts to $9.50 per share. That represents a 42 percent premium to Sun's closing stock price of $6.69 on Friday, and is about twice what Sun was trading for in March, before word leaked that IBM and Sun were in negotiations. While Sun wouldn't be Oracle's most expensive acquisition, it will be the largest in terms of the people involved. Sun employs about 33,500 workers, far more than the roughly 12,000 that PeopleSoft had when Oracle bought that company in 2005 for $11.1 billion — the biggest outlay during Oracle's expansion. Oracle, which already has roughly 86,000 workers, didn't specify how many people will lose their jobs after it takes control of Sun. The cuts might not be as dramatic as they would have been in an IBM acquisition because Sun and Oracle have fewer overlapping products. The smaller overlap also could keep Oracle from facing the antitrust objections that IBM likely would have prompted with Sun. Indeed, one of the sticking points in the IBM-Sun negotiations was the level of assurance Sun sought that IBM would see the deal through a regulatory review. Regulators figured to look closely at the way that swallowing Sun would expand IBM's lead over Hewlett-Packard in certain markets for servers and data storage. Oracle already says the Sun acquisition, which it expects to close this summer, will add at least 15 cents per share to its adjusted earnings in the first year after the deal closes. The company estimated Sun will contribute more than $1.5 billion to Oracle's adjusted profit in the first year and more than $2 billion in the second year. With former investment bankers Charles Phillips and Safra Catz steering things as the company's co-presidents, Oracle has been able to hit its financial targets in all its acquisitions during the past four years. That helped enable Oracle to earn $5.5 billion on revenue of $22.4 billion in its last fiscal year. Investors have enjoyed some of that prosperity too, with Oracle's stock rising about 35 percent since the PeopleSoft takeover was completed in 2005. Oracle recently decided to pay a dividend for the first time. But Oracle's emphasis on increasing profits will likely raise concerns in its new role as the steward of Sun's open-source software. "This gives Oracle the keys to the crown jewels of the open-source movement," said Wang, the Forrester analyst. Ellison said Oracle intends to invest more heavily in Java than Sun has been able to afford as its fortunes waned. While Sun still has big sales — $13.9 billion last year — its profitability has been hit and miss. Earnings last year were $403 million, but from 2002 through 2006 Sun lost more than $5 billion. The Sun-backed free OpenOffice software for word processing and spreadsheets also could be used to weaken Microsoft's franchise — an objective that would delight Ellison, who, like Sun co-founder and Chairman Scott McNealy, has long sought to undermine Microsoft's dominance of the computing industry. Microsoft said it didn't have specific comments on the Oracle-Sun deal, though Neil Charney, general manager of a software-development unit at Microsoft, suggested that customers "ask themselves if this will add more complexity and cost" to Oracle and Sun's products. Oracle's takeover came together in just days. Sun and CEO Jonathan Schwartz needed a deal fast after IBM withdrew its offer this month in a dispute over the terms of a buyout, and on Thursday, Sun reached out to Oracle, according to people familiar with the negotiations. That prompted IBM to put its previous offer of $9.40 per share back on the table, but Oracle swooped in with the higher price, these people said. They spoke on condition of anonymity because the details of the talks were considered confidential. A person familiar with IBM's position said the company isn't likely to rebid for Sun. IBM's chief financial officer, Mark Loughridge, even threw some competitive dirt on the deal during IBM's earnings conference call Monday. "Oracle and Sun have been partnering for two decades — and what's the result?" Loughridge said. "As I look at this and ask myself, `What's really changed,' I think, `nothing.'"
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