IBM's Hardware Slump Bodes Ill For Sun-Oracle

Fresh off their $7.4 billion deal to acquire Sun Microsystems, Oracle execs likely paid close attention to IBM's first quarter results Monday, given that Big Blue sells many of the same tech goods and services for which Sun is known. The news wasn't so good.Big Blue's report showed that the market for servers and other types of computing hardware in which Sun specializes has dried up across the board amid the recession.

IBM reported that System Z mainframe sales dropped 19% year-over-year, while sales of commodity-style System X servers plunged 27%. Midrange System p servers, which run the Linux and AIX operating systems, declined 2%. Overall, IBM's Systems and Technology Group reported a 23% drop in sales, to $3.2 billion.

That can't be good for Oracle given that its multibillion dollar buyout of Sun includes a lumbering hardware unit focused mainly on servers. Sun's server line, which offers the Blade, X64 and Solaris-powered SPARC enterprise systems, along with related sales, accounted for well over half the company's revenues last year.

As IBM's results reveal, few companies--and especially the large, TARP-burdened financial institutions that are the main market for SPARC servers--are in a position to shell out for pricey hardware these days.

So why did Oracle okay a big bucks deal for a vendor that derives most of its sales from a declining box business?

The company's hand may have been forced by IBM, which was engaged in its own merger talks with Sun over the past fortnight. Like a ball team that agrees to take on an overpriced veteran as part of a trade that nets a young superstar, Oracle may willingly overpay for Sun's hardware line just to get its hands on the ubiquitous Java Web development platform--and keep it from IBM's mitts.

"IBM's offer may have put a scare into Sun," notes Stuart Williams, an analyst at Technology Business Research. "Oracle has standardized its software stack on (Sun's) Java; it cannot afford to have one of its competitors own this crucial software building block," says Williams.

Sun also has other, budding stars on its software roster, including the open source MySQL database--which boasts more than 11 million installations--and some key virtualization technologies. Ultimately, Oracle may spin off Sun's hardware group, Williams believes.

Still, in announcing the deal, Oracle CEO Larry Ellison said Sun's hardware business is integral to his plans. "Oracle will be the only company that can engineer an integrated system--applications to disk--where all the pieces fit and work together so customers do not have to do it themselves," said Ellison.

If Ellison can't make good on that promise, IBM may be the real winner here--for the deal it didn't make.