Key to Oracle-Sun Deal: Storage, DB Hardware

Key to Oracle-Sun Deal: Storage, DB Hardware

The $7 billion acquisition of Sun Microsystems emanating from IBM on the other side of the continent was supposed to have happened back on April 6. But some thorny legal issues apparently got in the way, and it was not meant to be.

Two weeks later, and for a mere dime more per share, Oracle -- located a few minutes up the Bayshore Freeway from Sun -- came from out of the shadows to announce April 20 that it was acquiring the slumping company for $9.50 per share in a cash deal totaling about $7.4 billion.

The keys to this deal are pretty simple:

1) Enterprise software giant Oracle has decided it wants to get into the storage and database hardware business, where there is plenty of room for growth, and it believes Sun is the right horse to ride at this time.

2) Sun has deep and prosperous relationships with customers in the high-performance computing, telecommunications and government sectors that Oracle can now mine for more business.

3) The price was right. Oracle won't have to finance much, if anything. The transaction actually nets out to about $5.6 billion after Sun's liquid assets (an estimated $1.8 billion) are taken into consideration; Oracle has $8.2 billion of its own in cash and cash equivalents.

Speaking of financing, eWEEK had exclusively reported on March 24 that Oracle had considered an offer, in conjunction with Hewlett-Packard, to acquire Sun late in 2008. But Sun at the time still had IBM interested and turned down the proposal; Oracle was, in fact, Sun's fallback plan when the IBM deal blew up.

There's one more key to the deal: Oracle founder and CEO Larry Ellison will finally have his own operating system in Solaris and OpenSolaris. When this deal is completed sometime this summer, he'll be able to kiss Microsoft and Red Hat goodbye to an extent -- and not have to pay the substantial operating system "tax" he's been paying for years.

The good news for Sun is that most of its hardware people will be needed to maintain the server and StorageTek storage businesses; the bad news is that many of its prized software projects will be discontinued and released back into the open-source community.

Sun Will Soon Be Out of Hot Water

Sun is in a deep tub of hot water financially, having lost tens of billions of dollars during the last eight years since the x86 server revolution began murdering its very high-margin Solaris server business. The company, which had laid off tens of thousands of workers over the last four years, was in a serious red zone of becoming bankrupt -- perhaps as early as next year.

This acquisition by financially sound Oracle not only saves Sun from insolvency, but it also keeps a big number of large enterprise customers out of a serious IT quandary, should Sun's services suddenly have gone dark.

"Oracle now will be able to provide database servers and storage systems, which will be additional revenue streams for them," Forrester analyst John Rymer told eWEEK.

"As far as Sun's software goes, doesn't sound like they're [Oracle] expecting anything particular to come from that. [Oracle CEO] Charles Phillips talked about how great it will be to have control over Java, because we all rely on it so heavily -- not because it's going to produce big new revenue streams."

Suns Software Revenues Likened to Mice Nuts

"Phillips described Sun's software revenue streams as 'mice nuts,' quote unquote, compared to the rest of the Oracle product line," Rymer said. "Not interesting, not interesting at all."

Phillips was referencing Sun open-source software projects such as MySQL (database), GlassFish (Java application server), the Java identity authentication software franchise, the NetBeans software tools, and several others.

"Oracle, however, might decide to keep the identity software -- that's really good," Rymer said. "What'll happen is that these projects will revert back into the open-source world, they'll live or die there, and we'll see how good this stuff really is."

An interesting challenge here, Rymer noted, is that Oracle has done a lot of business with Hewlett-Packard over the years to create database machines. "Now they're going to compete with them," he said. "I don't think HP's going to be thrilled about this."

In the most general terms possible, Sun is, and always has been, a company of engineers first and sales people second. Oracle certainly has an excellent engineering division, but it also has one of the most aggressive sales forces known to man, led by the Big Kahuna salesman himself, Ellison.

Can Oracle Sell Sun's Wares?

Can Oracle sell Sun's products and services and make better profits?

"Oracle is very good at making money in open source," Enterprise Strategy Group storage analyst Brian Babineau told eWEEK. "Look at their deal to resell Red Hat [Linux] and make the money on maintenance and support."

That agreement, signed seven years ago, has been very profitable for both companies. So much so, in fact, that Oracle was rumored a month ago to be ready to acquire Red Hat -- the most financially successful open-source company in the world -- all for itself.

But when IBM dropped its offer for Sun two weeks ago, the wheels for this deal apparently started to turn in earnest at Oracle headquarters in Redwood City, Calif.

"I would expect a capitalistic approach to the MySQL business -- whether it is get rid of the R&D and just sell it, or move customers to Oracle DB," Babineau said.

"The bigger question is: Does Oracle stay a horizontal server and storage hardware company? All indications are that they were viewing these as expanding market opportunities."

Depending upon what Oracle decides, MySQL -- a popular open-source enterprise database that competes directly with Oracle's frontline product -- could become a minor player inside the merged company, or it could be set adrift.

Sun's stock price closed up about 37 percent at $9.15 on April 20. Oracle's was down 1.2 percnet at $18.82. Stay tuned on this one.

Editor's note: This story was updated to add financial detail.