Oracle Joins the Hardware Big Leagues with Sun Buyout

By John Pallatto  |  Posted 2009-04-21

Oracle Joins the Hardware Big Leagues with Sun Buyout

Oracle's $7.4 billion acquisition offer of Sun Microsystems gives CEO Larry Ellison a chance to do something he probably has always wanted to do-build a vertically integrated hardware and software company along the lines of IBM and Hewlett-Packard.

He built Oracle into one of the top software companies in the world. Oracle has consistently turned up as second or third on the published lists of the world's largest software companies, behind IBM or Microsoft depending on who is doing the counting. Ellison has never wanted to be anything but No. 1 in any market, which is why his company has shelled out more than $50 billion to date to acquire software companies that would add to its revenue stream and its technology portfolio.

The Sun buyout isn't even Oracle's biggest deal. That distinction goes to Oracle's acquisition of enterprise resource planning software provider PeopleSoft for $10.3 billion in December 2004. It's also eclipsed by middleware and application development tool company BEA Systems for $8.5 billion.

So far Oracle hasn't stumbled with any of these acquisitions. Despite the massive cost of all these acquisitions, Oracle has reported quarter after quarter of hefty revenue growth at least until the company started to feel the full effects of the recession that started to erode sales and profits across the tech sector late in 2008.

But the Sun buyout put Oracle into a whole new league. Going into the hardware business gives it a chance to go to customers with the pitch that it can supply virtually all their IT needs from soup to nuts-servers, storage, database software and a multitude of applications. If there is any weakness in this lineup, it is the lack of a vigorous services business, since Oracle has historically relied mainly on channel partners for product services. But Oracle can always build or buy an IT services group.

I have to disagree with my esteemed colleague Joe Wilcox, who contends that Oracle will effectively kill off Sun. Yes, it's the end of Sun as an independent company. But that's not Oracle's doing. Sun's management can only blame itself for all the missteps that caused it to go from a cash-rich industry powerhouse to a weak market has-been that had to go hat in hand to prospective buyers before it ran out of cash and time.

Will Sun Get a New Lease on Life?


However, the Oracle buyout gives the Sun brand at least a chance for a new lease on life under the Oracle umbrella. If Oracle is smart, it will retain the Sun brand and market identity while continuing to invest in server and storage research and development.

Sun still has many loyal customers. Oracle has been one of the most loyal. The two companies grew up together in Silicon Valley, and Oracle has run his own IT centers mostly on Sun equipment. It hardly makes sense that Oracle bought Sun so it could slap an Oracle logo on Sun's boxes. But stranger things have happened.

This isn't Oracle's first foray into the hardware business. There are some who may yet recall that Oracle was one of the chief proponents of the "network computer," a stripped-down computer without its own data storage disk drive that would connect to centralized servers and databases to access applications and data. Oracle actually trademarked the term "network computer division" and in the mid-1990s promoted an alliance of manufacturers, including Sun, to build and sell the devices.

Now Oracle is in the hardware business with both feet for better or worse. It gets a chance to show whether or not it can build an integrated hardware and software business on the scale of an HP or an IBM.

That has to be an important factor to Ellison, who will turn 65 in August, an age when most corporate chief executives head off to retirement, though not necessarily so in his case. But he has to be thinking about his legacy. And the massive buying binge the company has engaged in for the past six years was intended to give Oracle the power and resources to stay vigorous perhaps for decades to come-long after he has left the company he founded.

The challenge for Oracle will be to keep Sun from becoming a drain on his own cash reserves. Oracle must wring out all the redundancies and expenses from Sun operations. Oracle has shown time and again that it can do just that with ruthless efficiency. But it also much restore the competitive edge of Sun products, something that was lost with Sun's stubborn refusal to use Intel x86 processors in its servers and its adherence to the SPARC processor platform long after it had ceased to be a market advantage for the company.

But most of all, Oracle has to prove to all those other loyal Sun customers that there is an upgrade path for all the Sun hardware and software they have invested in over the years.

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