Oracle, Entering Hardware Arena, Agrees to Buy Sun
Added 21st Apr 2009Oracle will pay $9.50 per share in cash for Sun, or $5.6 billion (about Rs 28,000 crore) net of Sun's cash and debt, according to Oracle. The move follows Oracle's purchases of a raft of companies in the last few years, including Siebel, PeopleSoft and BEA Systems.
The deal comes after Sun reportedly walked away from an offer from IBM a few weeks ago. Though there were rumors Oracle might purchase Sun, it has never before had a hardware or server OS business, a market in which a significant amount of Sun's assets are tied, so the deal seemed unlikely. However, Sun's Solaris long has been a successful platform for Oracle's database business.
The two companies also have areas of common interest in their support for Java software, one of the only areas where the companies' product lines overlap. Sun has an open-source Java application server called Glassfish that Oracle likely will hold onto, although the fate of Sun's other commercial Java software, the Java Enterprise System (JES), is unknown.
Oracle also had overlap in this area when it purchased BEA, but BEA WebLogic had significant installed base, and Oracle kept the product alive. Sun's installed base for JES is smaller, so Oracle may choose not to hold onto it.
Oracle said the Sun deal should bring the company more revenue in the first year than the company planned for its acquisitions of BEA Systems, PeopleSoft and Siebel combined. Sun should contribute $1.5 billion (about Rs 7,500 crore) to Oracle's non-GAAP operating profit in the first year, a number that will increase to more than $2 billion (about Rs 1,000 crore) in the second year, the company said.
For Sun, the deal will bring an end to CEO Jonathan Schwartz's [cq] efforts to turn the struggling company around. Sun's sales have been declining since their peak during the dot-com boom, as customers turned away from its pricey Unix servers in favor of x86 systems. Sun's share price has also fallen sharply.
Efforts to attract new customers with open-source software, and Sun's belated decision to enter the x86 market, have not paid off fast enough to give it the boost it needs.
With Sun on board, Oracle now will have to figure out how to navigate the server OS and hardware business. In addition to supporting Solaris for many years, Oracle also supports its software on Linux. Though Sun's hardware does not have the reach that its former suitor IBM's does, the deal gives Oracle a combined hardware/software business model more akin to IBM's, with which it now competes in the database market.
According to Kapil Dev Singh, Country Manager, IDC India, "the Oracle-Sun merger brings together two strong brands with strengths in software and hardware space with the combined entity aspiring to make a mark in the enterprise IT space. Sun's strong computing platform and Oracle's middleware and database platforms will make Oracle's IT infrastructure offering stronger. What brings added value is their consolidated face as part of the bigger IT infrastructure offering in an environment where individually these components are a commodity."
He added, Oracle-Sun's competitive positioning in telecom and BFSI space will strengthen as individually both players have a strong presence in these segments that contribute about one-third of India's domestic IT market.
The challenge for the merged entity lies in how well it can convince CIOs keen on leveraging their IT investments that is completely a services play. With applications, middleware and hardware piece in place, the services capability seems to be missing. This is important considering that the IT consolidation wave in enterprise space in general, and telecom and BFSI segments in particular, is slowly giving way to IT leverage wave. This deal seems to be little late from that perspective.
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