Oracle's announced acquisition of Sun Microsystems brings closure to a difficult seven years for Sun, which continued to be a technology innovator in systems and software, but had difficulty regaining sustained profitability following the dot.com bust of 2001-2002. Sun was having a rough time in the current recession, with fewer "big deals" and many low-margin deals for hardware and support services. Importantly, Sun had difficulty monetizing the investments it had made over the years in its key
differentiators—Java, Solaris and OpenSolaris. It also struggled to sustain significant momentum in the storage sector following its 2005 acquisition of StorageTek.
On April 20, 2009, Oracle and Sun announced that they have entered into a definitive agreement through which Oracle would acquire Sun common stock for $9.50 per share in cash. The transaction is valued at about $7.4 billion, or $5.6 billion net of Sun’s cash and debt. The deal, which would need to be approved by Sun stockholders and by federal regulators, is expected to close by summer, 2009. Sun's business has a run-rate of more than $13 billion annual revenue, and Oracle has an annual run-rate of about $22 billion.
This deal was made in Silicon Valley, based on the longtime relationships not only between Oracle and Sun, but also between Oracle CEO Larry Ellison and Sun chairman Scott McNealy. It is likely that this is just a first step, and once the deal closes there will be a series of additional steps about which businesses to keep as standalone units, and which to combine with existing offerings. Certainly, Oracle has put forward the idea that holistic server-based solutions would be extremely useful to customers, combining a technology stack of standalone products—hardware, operating system, database, middleware, and applications—all of which the combined Oracle and Sun could offer.
Given its weeks of negotiations to buy Sun for a similar price—which was reported to be nearly $7 billion, or between $9 to $10 per share of Sun—IBM is very likely to be extremely frustrated with this deal. This is particularly true on the Java front because now Oracle will control the destiny of Java—and IBM will not—and because Java is an important leverage point for Internet computing, which underlies much of IBM's middleware stack (e.g. IBM WebSphere, IBM Domino). IBM may have become convinced that Sun simply didn't have any other options when IBM-Sun talks broke off in early April. However, the geometry of Silicon Valley relationships, which have brought the computer industry adaptability for many decades, seem to have surfaced in this deal.
In many ways, the current economic downturn is bringing about this IT industry inflection point, as vendors prepare for the next wave. The deal comes at a time of industry transformation, where technology convergence (servers, storage, software, networking connections, and services) is re-making the enterprise data center—and changing the way service providers deliver business value to their end-customers, either directly, or through cloud computing. Oracle said that it is considering building end-to-end technology stacks, leveraging Sun's servers, storage, and software, along with Oracle's database, middleware, and applications software—but it is too early in the acquisition process to predict what form this will take.
The biggest question will be the ultimate status and positioning of Sun's various hardware businesses—servers, storage, and tape. Although not an immediate problem, with respect to government approval of the deal, ultimately the combined company would have to rationalize the hardware business. Possible moves include spinning off the tape business as a separate business unit and figuring out how to market Sun's server and storage products, possibly as part of integrated solutions.
These server and storage businesses compete directly with those of HP and other server OEMs—all of which partner with Oracle for database, middleware, and application software. Further, Oracle is already partnering with HP to deliver an all-inone data warehouse solution, called Oracle Exadata, built on HP ProLiant x86 servers and the Oracle Database.
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