MoneyWatch Tech

Oracle to Buy Sun, Quakes to Shake Datacenters Everywhere

By Erik Sherman

Updated on: April 20, 2009 / 9:26 AM EDT / MoneyWatch

Oracle has announced a deal to buy Sun Microsystems for a total of $7.4 billion, or $5.6 billion net of the latter's cash and debt. The acquisition will change the landscape of enterprise computing, putting Oracle into total competition with long-standing business partners, who may still be locked by circumstances into working with the database giant.

According to Oracle, the acquisition will boost earnings by a non-GAAP 15 cents a share and contribute $1.5 billion in profit in the first year alone, with that number going to $2 billion in the second year. The company claims that the number would make the Sun acquisition more profitable per share than what it had planned "for the acquisitions of BEA, PeopleSoft and Siebel combined."

But more than that, an Oracle acquisition of Sun could transform the company into the single most powerful force in enterprise computing. Consider some of the issues in play:

If cloud computing is to become important to companies, data will have to sit in the cloud, which means databases, Oracle's bread and butter. As M. Eric Johnson, director of the Center for Digital Strategies at the Tuck School of Business at Dartmouth, says, Sun has "articulated a good vision of cloud computing." Given that much of the talk of full cloud computing, not simply remote resource availability, is still theory, that is an advantage.
Johnson also notes that Sun has been a "leading edge player" in some of the most demanding industry sectors. It has technical chops that would work well when optimized for database use as Oracle did with HP last year, speeding performance, particularly on large data sets. The combination could be a powerhouse compelling to any CIO.
Adding Java to Oracle's software pantheon would give it more ability to move cross platform -- and its products are already available on those most commonly used by IT shops. As IDC research vice president Jean Bozman notes, the first step in real cloud computing is "virtualizing the server and storage," putting a premium on working across an entire infrastructure. Having Java positions Oracle to expand its offers of the type of cross-platform controls that IT shops want and need. In fact, Oracle Fusion Middleware is Java-based.
Ironically, Fusion increases the demands placed on servers because of its Java base. Now Oracle can help make the leap happen at a lower price because it will control a source of server hardware.
Because Oracle's big money comes from database licenses, it could use server hardware as a loss-leader if necessary, or at least drive down margins to the point of creating enormous pain for hardware competitors.
Bozman has noted that as of last year, Sun had sold a total of 1.6 million to 2 million servers, with an even greater number of X86-based hardware from other companies running Sun's OS, Solaris. That's a big number of upgrades and opportunities to cross-sell more Oracle products.
Although the Oracle press release does not mention this point, by acquiring Sun, it also buys the popular open-source database MySQL. Nothing like buying what could be a major thorn in the side and also get entry into a wider world of companies that need databases but haven't had the budgets or even need for Oracle's main products. This lets Oracle expand naturally into small and medium businesses, giving it major growth opportunity and letting it step ahead of SAP, which has been badly fumbling in trying to open new markets. It also gives Oracle another tool to compete against Microsoft SQLServer without having to devalue or downsize its eponymous database.

There are some problems on the business partner front. Although the Oracle-HP hardware alliance was enough to raise hackles, this is throwing the gauntlet down before the likes of HP, IBM, and Dell. However, unlike IBM, virtually every hardware company has to deal with Oracle, as it's the main force in databases. They can't walk away, and so will have to hold their noses to a large degree. After all, what are they going to do? Shift to IBM's DB2 and convince their customers to do the same?

And the problems that would have arisen among Sun's ecosystem of VARs, dealers, and partners largely disappear. Unlike what would have happened with an IBM acquisition, there is no competing line of hardware, and those selling Sun equipment have no fear that their interests will be shunted to the side in favor of an existing server line.

All in all, it's a smart move for Oracle at a relatively low price and could make the company the hub of data center activity for many companies.

But then, as my BNET colleague Michael Hickins notes, the two companies have such divergent corporate cultures as to make this a potentially explosive acquisition.

Image of Larry Ellison picture looming over Scott McNealy via Flickr user Eddie Awad, CC 2.0.