April 20, 2009
As a result of acquiring Sun Microsystems, Oracle will become an operating system and hardware vendor, two things it's expressed little interest in doing in the past. And in doing so, it will compete more directly with two powerful systems vendors that are frequently its partners, IBM and Hewlett-Packard.
But there's a reason this deal has come off when negotiations with IBM, which is a hardware and operating system vendor, led to a dead end.
As Silicon Valley neighbors, Sun's and Oracle's leadership have been allies and supporters of each other's interests for two decades. Oracle was an early Java supporter, perhaps second only to IBM, and sold many of its database systems to run under Sun's Solaris. Even when it announced several years ago that Linux was its target operating system, Oracle continued to sell the largest share of its databases under Solaris.
"In our opinion, Solaris is by far the best Unix operating system on the market," CEO Larry Ellison said at a teleconference announcing the deal this morning. More Oracle databases run under Solaris than Linux, which is the No. 2 operating system for Oracle "and still important to us," Ellison said.
"Sun and Oracle grew up together in the Silicon Valley. There was more synergy between them. Oracle is a better choice, culture wise, than IBM," said Gartner analyst Kenneth Chin.
And while they sometimes competed, they never fell into the class of competitors who could threaten fundamental interests, as Sun and IBM did in the period between 1998 and 2003. Sun refused to relinquish control of Java to an international standards group, as IBM had recommended after helping establish the language. IBM undercut Sun's effort to enter the Java tools business by releasing the Eclipse programmer's workbench. Their talks that began in March fell apart April 5.
By becoming a systems vendor, Oracle will move from being a software company to one that packages solutions "from database to disk," Ellison said, reminding teleconference listeners that Sun acquired Storage Technology in 2003 for $4.1 billion, and that business also will become part of Oracle. Oracle will pay $5.6 billion for all of Sun, after accounting for Sun's current cash and short-term investments.
Oracle will pay a price similar to the one Sun agreed to in negotiations with IBM, $9.50 a share, and Chin said Gartner "doesn't expect significant regulatory hurdles" to emerge with this deal. If IBM had bought Sun, it would have represented a heavy concentration of the commercial Unix market in one vendor's hands and faced Justice Department review.
Chin said he expects Oracle to evaluate Sun's server line and perhaps trim it back. But he said Oracle is oriented to selling large systems to corporate customers, and that means retaining the high-performance end of the UltraSparc server line. Oracle will have to invest in an UltraSparc design crew designing server chips that compete with Intel's and AMD's. Sun outsources the chip fabrication.
At the same time, Oracle has met success with its data warehouse machine engineered with HP on x86 hardware, and it's likely to explore growth avenues in x86 servers, Chin said. Knowing what to do with the open source MySQL database "may be a challenge" for Oracle, he said. Sun paid $1 billion for MySQL AB in early 2008, then watched as founders David Axmark and Michael "Monty" Widenius and CEO Marten Mickos, the core MySQL brain trust, left the company. Oracle may continue to host MySQL development as a way to increase the number of relational database users, and build an Oracle software stack that includes MySQL with some of its Java middleware, as a low-end bid for developers to get involved with its software, Chin suggested.
Oracle has previously ingested open source databases InnoDB and BerkeleyDB as embeddable systems and complements to the existing Oracle product line. The two remain open source code inside of Oracle. MySQL, however, competes more directly as a relational system suitable for new Web-oriented applications, since it excels at serving Web pages fast. MySQL and other open source databases were working at becoming more direct Oracle competitors. EnterpriseDB, based on the open source PostgreSQL system, claims it can migrate Oracle customer to its system.
Oracle can't literally kill off MySQL by buying Sun. Its large body of developers and users -- Sun claims there are 2 million of them, although only a small portion pay Sun for MySQL support -- would be likely to fork the code and start a project that sustains the open source version of the database. So Oracle is likely to proceed with caution, viewing the MySQL community as a potential source of new customers for some of its software, if not its commercial database.
Oracle would be delighted to let MySQL customers continue to use their favorite database if there were some way to convert a small percentage of them each year to its Fusion middleware suite. Middleware is the company's "fastest-growing business," said Ellison. The acquisition of Sun will introduce a new set of Java middleware, in a few instances adding new products and in many adding duplicates that Oracle is likely to weed out. Ellison said middleware, a key building block of its applications business, is destined to be as big a revenue generator as Oracle's database business.
Regardless of the outcome, Sun has finally found a way to rationalize its high operating expenses in a downturn: be acquired by an organization capable of swift layoffs and ruthless R&D cost cutting. Both are likely to result in what one analyst firm termed "a major bloodletting" as heads rolls and reductions in force occur.
Oracle will drive operational efficiencies that "Sun never had the courage to enact," Technology Business Research analyst Stuart Williams wrote Monday.
"Oracle will lay off between 10,000 and 15,000 Sun employees and gain annual savings of $1.5 billion in operating expense in year one and over $2 billion in the second year," he predicted. But that outcome was somewhat predictable before Oracle surfaced as a buyer, said Chin. "Sun was struggling" going into the economic downturn when it began talks with IBM. No one else was interested in Sun at the time, IBM spokesmen said, giving Sun a take-it-or-leave-it ultimatum. But the thought of IBM owning Sun must have forced a realization at Oracle of how much its own future is focused solely on Java. It's converting Siebel, PeopleSoft, and JD Edwards applications into a new Java application suite with which it hopes to best SAP in the marketplace.
If Sun had to sell itself to the highest bidder, which after IBM might have become anyone willing to bid, than Oracle would have been left in the uncomfortable position of needing to buy a Java license from a powerful competitor. Perhaps buying Sun, with its sprawling product lines, looked like the better alternative.
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