Oracle (ORCL) Leaps Ahead of IBM, Lands Deal for Sun Microsystems (JAVA)

In a surprise move yesterday (Monday), Oracle (ORCL 19.40 ↑3.08%) Corp. (ORCL) pounced on the opportunity to buy Sun Microsystems Inc. (JAVA (9.18 ↑0.33%)), for about $7.4 billion in cash, stepping in after Sun’s talks with International Business Machines Corp. (IBM (100.826 ↑0.39%)) fell apart.

The deal gives Oracle control of server and software maker Sun’s coveted Java programming language and brings to a close Sun’s 27-year reign as the maverick of Silicon Valley. Java is the dominant language of the Internet and runs on over 1 billion devices worldwide.

The acquisition is in line with Oracle’s overall business strategy. Oracle, the world’s second-biggest software maker, has dropped $34.5 billion on buyouts since 2005, making it the most aggressive software company in the hi-tech field.

"The deal would strengthen Oracle’s position against IBM. Oracle has done a good job on acquisitions it has done earlier," Robert Jakobsen, analyst at Jyske Bank in Copenhagen, told Reuters. "It makes sense also historically. Oracle has been more successful commercializing software than Sun."

Oracle said it will pay $9.50 a share for Sun - a 42% premium to Sun’s April 17 closing price. Sun had previously rejected IBM’s offer of $9.40 a share, according to sources cited by Reuters.

The acquisition, scheduled to close this summer, will add about $1.5 billion to Oracle’s operating profit, excluding some items, in the first full year after closing, Oracle President Safra Catz said.

The merger cements the relationship between the two companies, who have been partners with each other for more than 20 years. Oracle’s Fusion Middleware, its fastest-growing business, is built on Java. Sun’s Solaris software platform is also the operating system for Oracle’s database business.

Solaris competes against Linux and Microsoft (MSFT 18.8092 ↑1.07%) Corp.’s (MSFT) Windows software. Software sales at Sun accelerated by 21% last quarter and the company projects revenue from those products will reach about $600 million a year. By comparison, software sales at Oracle totaled $17.8 billion in its latest fiscal year.
The takeover also gives Oracle entry into the server-computer market, pitting it against IBM in the market for selling products for data centers that run networks and corporate web sites.

“The industry is going toward data centers,” Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon, who rates Oracle shares “outperform,” told Bloomberg. “This is Oracle’s move to continue to consolidate the industry.”

"It moves Oracle more into the competition with Hewlett Packard (HPQ 34.89 ↑0.61%) Co. (HPQ) and IBM and Microsoft. It makes them a player in the (enterprise data center) space," Shannon Cross of Cross Research, told Reuters. “It’s going to give them access to customers who weren’t using the Oracle database."

Sun was known as a market-leading software innovator that rose to prominence in the 1990s, but fell on hard times when the dotcom bubble burst in the early 2000s. As demand for its servers dropped, it lost more than $5 billion from 2000 to 2005 and has never fully recovered.

The company has been in play for months, with IBM, Oracle, Hewlett-Packard Co, Dell Inc. (DELL (10.45 ↑1.36%)) and Cisco Systems Inc. (CSCO (17.48 ↑0.98%)) having all been rumored as possible suitors according to Bloomberg, citing bankers with knowledge of the matter. Many analysts were skeptical the company would be able to find another buyer after talks with IBM collapsed.

Besides price, IBM may have bowed out of the picture because it was reluctant to face antitrust issues. Since there are significantly fewer overlaps between Oracle and Sun, the deal is less likely to get bogged down in regulatory reviews.

By Don Miller