Disruption in the Tech Sector: Oracle to Acquire Sun for $7.4 billion

Oracle announced it will acquire Sun, a rival IT firm, for $9.50 per share, or ca. $7.4 billion, or $5.6 billion net of Sun’s cash and debt.  The announcement comes two weeks after IBM ended talks to acquire Sun.

In acquiring Sun, Oracle is upending the IT industry.  Oracle has long-standing partnerships with Sun competitors HP and Dell, as well as with Sun, to provide servers on which to run Oracle databases.  The move puts Oracle into the hardware business, putting the company in even more direct competition with IBM, which sells its own servers in conjunction with its database tools and applications, as well as with HP and Dell.

In making the announcement, Oracle CEO Larry Ellison reminded IBM that Oracle will be “the only company that can engineer an integrated system – from applications to disk…”  IBM sold its disk drive business to Hitachi in 2002.

Oracle will gain ownership of two key Sun software assets: Java and Solaris.  The former, given’s Sun’s use of Java for its Fusion Middleware business,  may very well be Oracle’s most significant software acquisition the company has made (in recent years, Oracle has acquired BEA, PeopleSoft, and Siebel).  Sun clearly didn’t want these assets to fall into the hands of a competitor.  Oracle will also be able to optimize the Oracle database to leverage unique features of the Solaris operating system, although the company took pains to state that it is “as committed as ever” to Linux and other open platforms.

While Sun might have represented a difficult entity for IBM to swallow whole, given the vast differences in corporate culture, the Oracle-Sun combination may be somewhat smoother.  Scott McNealy, Sun’s co-founder and chairman, and Ellison have been close allies and both have engaged in repeated Microsoft baiting over the years.

Sun is promising that the acquisition will add $1.5 billion in operating profit in the first year (the acquisition is expected to close this summer).  Very few acquisitions work as advertised (think Time Warner and AOL) and Sun lost almost $2 billion in the last two quarters.  Most customers of both companies, however, will likely cheer as the acquisition removes much (but not all) of the uncertainty in terms of product direction and support.

Jonathan B. Spira is the CEO and Chief Analyst at Basex.

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