Jilted Sun Snapped Up by Oracle for Application Systems
April 27, 2009 Timothy Prickett Morgan
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Well, the drama between IBM and systems rival Sun Microsystems is over, now that database and application software giant Oracle is ponying up $5.6 billion in cash and debt to acquire Sun. Or, perhaps, it is just beginning, and perhaps Oracle has seen the light and will be creating a little something midrange folk know as the Application System, 400 Not Included, slash reserved for competitive battles in the marketplace. Sun’s private equity backers and frustrated Wall Street investors ran out of patience with Sun’s promises of eventual revenue growth and a return to profitability about the same time that the economic meltdown started up in full roar last summer. Since that time, it appears, Sun’s top brass have been shuttling around the world, seeing who might save Sun from itself, or at least from its investors. The rumors have it that networking giant and server wannabee Cisco Systems was approached by Sun, but declined, as did the most obvious Sun buyer, Japanese Sparc chip and system maker and Solaris licensee Fujitsu, which is wrestling with its own financial issues. There was another rumor that server maker Hewlett-Packard and Oracle were going to tag team the deal, with HP getting the server and storage iron and Oracle getting the software, ripping Sun apart like two wolves arguing over a moose carcass. Apparently the numbers were too low for Sun’s board of directors to entertain. And then, back in March, rumors surfaced in the Wall Street Journal that Big Blue was ready to shell out somewhere between $7.3 billion and $8 billion ($10 to $11 per share) to acquire Sun (which also had somewhere around $1.8 billion in cash and various debts that IBM had to assume as part of the deal). As the weeks went on and IBM was trying to value Sun’s various hardware and software businesses, IBM dropped its offer to between $9 and $10 per share, and then it slipped to $9.40 and below. And despite a board split where some Sun board members wanted to take the deal and others didn’t, Sun rejected the offer from IBM reportedly because it was not convinced that Big Blue would stand up to antitrust regulators and see the deal through. Oracle buying Sun was greeted with surprise, but I can’t imagine why, especially with the rumors out there that Oracle wanted the software bits of Sun. Oracle is particularly keen on the Java programming environment, which the software giant has staked its future upon, but also is interested in controlling the Solaris Unix operating system and its add-ons and the MySQL database, which Sun bought for $1 billion in January 2008. Oracle and Sun are the two darlings of the dot-com boom, and they have been partners for a long time. At $5.6 billion, Oracle is getting control of Java, Solaris, and MySQL for a pretty fair price. And, Oracle is removing a possible competitive threat from its war board–as IBM was most certainly trying to do as it went through the motions of acquiring Sun but then chickened out because IBM doesn’t like antitrust lawsuits, having been burned by them twice in the past. (I went into this recently; see IBM Really, Really Doesn’t Want Sun for more on that.) With Sun undoubtedly facing lawsuits after rejecting the IBM deal as soon as it talked about it publicly when it reports its financial results on April 28, and IBM reporting its own financial results on April 20 after the market closed, Sun’s top brass, wanting to cover their butts, were under intense pressure to do a deal before IBM started talking. And while Sun may be slow to move in some markets, the company arranged for the deal and slapped together a press conference with Oracle before Wall Street opened last Monday morning. (Oracle’s servers were swamped and could not handle the Webcast, and the telephone conference system crashed, too; a bit embarrassing for Oracle, which clearly needs some hardware help.) Larry Ellison, Oracle’s co-founder and chief executive officer, explained how Solaris Unix is the most popular platform on which Oracle’s eponymous databases are deployed, but quickly added that Linux was number two on the operating system hit parade for Oracle and that the acquisition in no way, shape, or form meant that Oracle was backing off on its support for Linux, particularly its own clone of Red Hat Enterprise Linux, called Oracle Enterprise Linux. Ellison added that the deal would mean that Oracle could tightly integrate its databases with Solaris, and that this integration would allow Oracle to offer Sun systems that would have lower TCO than alternatives. “Oracle will be the only company that can engineer a complete, integrated system, from applications to disk, where all the pieces fit and work together so customers do not have to do it themselves,” Ellison explained. “Our customers benefit as their systems integration costs go down while system performance, reliability, and security go up.” After Scott McNealy, Sun’s grumpy and yet often funny co-founder and chairman said that Sun was “thrilled to be acquired by Oracle” and that it was “truly a momentous day for the industry,” Jonathan Schwartz, Sun’s president and chief executive officer (who argued strongly to take the IBM deal to save his own cookies) inhaled deeply and gave us his blessing to the Oracle acquisition of the company. “There is no question in my mind that this transaction redefines the industry, redefining the boundaries that have frustrated the industry’s ability to solve the problems that customers seek to solve, eliminating the cost and complexity of an industry that focuses on components instead of systems,” Schwartz said without stopping, then inhaled again slightly. “The combined Oracle and Sun will be just that: a systems and software powerhouse.” Then Charles Philips, Sun’s co-president, took over and said Oracle would be “engineering a true system,” and might even deploy appliances that are geared for specific industries, complete with application software, for customers, all pre-integrated, all ready to run. Any of this sound familiar to you, AS/400 Faithful? Maybe we will get lucky and IBM’s top brass were listening in on the Oracle-Sun call. At the very least, what the executives at Oracle and Sun are saying validates more than 30 years of System/38, System/36, and AS/400 engineering and experience at IBM; at least 22 years, anyway, since I am not sure IBM has itself believed in the AS/400 value proposition since it did that whole eServer homogenization with the iSeries line. Maybe there is hope for the AS/400 yet. It would just be sad for AS/400 shops that the hope for an integrated system ends up being at Oracle, not at IBM Rochester. Anyway, Oracle hopes to complete the Sun deal by summer, and I cannot imagine why antitrust authorities in the United States or Europe would block the deal. I can’t imagine another company swooping in to try to take Sun away from Oracle, either. What I can see is that Oracle will slash a large number of Sun employees, and possibly sell off Sparc chip development to Fujitsu, Intel, Taiwan Semiconductor, or Global Foundries, the chip fabrication company that Advanced Micro Devices just spun out. Safra Catz, the other co-president at Oracle, said that in the first year as part of Oracle, the Sun unit would yield $1.5 billion in non-GAAP operating income and that would bring 15 cents per share to the bottom line. She added that Sun would, by Oracle’s estimates, be more profitable than the combination of PeopleSoft, Siebel Systems, and BEA Systems were when Oracle acquired them. That sure sounds like a lot of layoffs for Sun, considering that the company is not really making money. Oracle has taken a run on hardware before–the Network Computer from 1995, Raw Iron database servers from the dot-com boom, and Exadata data warehousing appliances announced last year in partnership with HP. All of these products have basically bombed, despite sounding like a good idea. So an Oracle that owns Sun has two problems: cutting costs and and creating profitable application systems that sell. It will be interesting to see how Oracle does. With 300,000 combined customers–dwarfing the AS/400 and its progenies installed base, which I figure must be down to around 200,000 customers these days–Oracle has a much better shot than anyone in the industry. At least until IBM wakes up, stops wasting its money on buying back shares to appease Wall Street, and buys SAP to make a whole new line of application systems. I think Application System/700 sounds pretty good, myself, as a name for such a line of machines, which might run z/OS, i, AIX, and Linux and have DB2 tightly integrated into them. RELATED STORIES IBM Really, Really Doesn’t Want Sun The IBM-Sun Saga Continues–Or Rather, Doesn’t IBM Poised to Buy Sun, Rumors Say Wall Street Makes IBM, Sun Strange Bedfellows?
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