Oracle/Sun Takeover Strategic Corporate Finance FIN 501 June 06, 2010 Oracle/Sun Takeover The database software giant Oracle Corp. (Oracle CP-Analysis Report) announced the completion of its pending acquisition of Sun Microsystems Inc. , a provider of enterprise computing systems, software and services, for $7. 4 billion ($9. 50 a share) or $5. 6 billion net of Sun’s cash and debt. Sun has been de-listed from the Nasdaq. Sun’s CEO Jonathan Schwartz is expected to resign as the transition moves forward. (Zacks Investment Research) Sun shareholders were the losers in this deal.
According to a poll by the Shareholders Foundation, Inc. , an investor advocacy group that does research to shareholder issues and informs investors of securities class actions, settlements, judgments, and other legal related news to the stock market, the majority of the participants (22%) think a price of $13-16 per Java share would be fair to Sun Microsystems investors in case of a takeover, 7% favor a price between $4-$8, 18% favor a price between $9-$12, 14% favor a price between $17-$20, 15% favor a price between $20-$24, 7% favor a price between $25-28, and 18% think the price should be over $28. Allen) “The acquisition was on hold for nine months pending the European regulator’s approval as it would decrease competition in the database market. However, the regulators approved the acquisition recently after Oracle reassured them that it would support, license and develop MySQL – Sun’s open source database software. ” (Shubham) Oracle laid out various strategies for new product launches and the integration of the two companies.
With Sun’s acquisition, Oracle will enter the hardware market, where it plans to integrate Sun’s hardware business (the Sparc chip and the Solaris operating system) into its own database and business applications software business. This integration will open up Oracle from its traditional software business model. Oracle plans to move Sun’s hardware offerings onto a build-to-order model, under which it will launch new high-end systems. Current and future Oracle shareholders will reap the benefits of this deal. Further, Oracle will close down two distribution centers, one in the U. S. nd the other in Europe, following the acquisition. Oracle also plans to hire 2,000 salespeople, engineers and developers, while eliminating about 1,000 Sun employees. ( Will Oracle rehire Sun employees into those positions? ) Oracle will also increase its R&D spending by $1. 5 billion in 2011 to boost investment in new products. Last year, Oracle spent $2. 8 billion on research, while Sun spent $1. 6 billion. Oracle said that it would sell products and provide technology services directly to Sun’s customers instead of relying on third-party service providers, a strategy similar to that previously followed by Sun.
Oracle’s CEO has also reassured users of Sun’s equipment and software regarding continued refining of Sun’s products. By adding sales staff, increasing direct sales to Sun’s largest customers and increasing R spending, Oracle plans to make Sun Microsystems profitable. Sun’s shareholders bear the brunt of this acquisition but the customer should be reaping the benefits. The acquisition will enable Oracle to eliminate its prime competitor, Sun Microsystems, and help the company compete against IBM, its biggest database software rival, as well as Hewlett-Packard and Cisco Systems .
The acquisition of Sun will give Oracle more control over the development of Java, a key technology used in its products. (Oracle CP) The acquisition is expected to be lucrative to Oracle’s earnings by at least 15 cents per share on a non-GAAP basis in the first full year of closing of the transaction. The acquired business will contribute over $1. 5 billion to Oracle’s non-GAAP operating profit in the first year, increasing to over $2 billion in the second year. The acquisition will bring long term synergies to Oracle besides strengthening its competitive position and increasing its developer base in enterprise computing. Daily Markets) While Sun’s results were not showing any spark in the recent quarters with poor execution and deteriorating market share, the acquisition by Oracle will revitalize the Sparc and Solaris operating systems and strengthen the Java development platform. With the addition of servers, storage, SPARC processors, the Solaris operating system, Java, and the MySQL database to Oracle’s portfolio of database, middleware and business applications, Oracle will be well positioned to grow n the database market. Following the acquisition, Fitch Ratings raised Sun Microsystem’s issuer default rating to “A” from “BBB-”, indicating a stable outlook. (Oracle CP) While Oracle is expected to become the top player in the database software market, ahead of IBM, we remain concerned about the company’s integration of Sun, which is something to look out for. Even if it is successful, we believe it will take years to provide incremental benefit to either Sun or Oracle shareholders or the consumer. Zacks Investment Research) Oracle has been a good Java citizen to date, suggests Gartner Group, and will be aware of the implications of rocking the boat too much. “Java is among the most valuable assets at stake in Oracle’s proposed acquisition of Sun. Gartner believes that control of Java was one of the main drivers behind the deal,” says Gartner Group’s Massimo Pezzini. “But ownership of Java will require some diplomacy on Oracle’s part. If Oracle makes over Java into a proprietary technology or dramatically increases the cost of Java licenses, it risks limiting Java’s popularity and profitability.
IBM, SAP and Nokia have never perceived Sun as a threat to their business in the enterprise software and mobile markets comparable to the threat potentially represented by Oracle. The outcome, he says, could be that important Java industry participants believe Oracle has “hijacked” Java, they will strive to reduce their dependency on a technology controlled by a major competitor. “Heavily invested in Java, these companies could not afford to suddenly drop their support for it due to the large number of their customers using Java-based products and the lack of readily available alternatives,” Pezzini adds. Instead, vendors may be tempted to develop their own Java-compatible technologies. ” This would raise the prospect of a fragmented Java market with different flavors. “The market could break down into the ‘true’ Oracle Java, IBM’s derivative, an SAP variant and possibly ‘open source’ variants,” notes Pezzini. “Such fragmentation would be catastrophic for Java as well as for Oracle, dramatically devaluating its acquisition. ” But he also believes Oracle is likely to take aggressive steps to reassure the industry that it will maintain and possibly reinforce the open nature of the JCP and Java. The IT industry values Java for its vendor-neutral and open qualities. For 15 years, users and independent software vendors have invested in Java and facilitated its adoption, due largely to the portability of Java applications across hardware platforms, operating systems, database management systems and other systems,” Pezzini continues. “Should Java technology fragment or should Oracle be perceived as ‘locking in’ Java to a proprietary technology, the IT industry is likely to lose its enthusiasm for Java and seek alternatives — with Microsoft as the most obvious option. (Lochlin) Oracle could destroy the Sun Java products if the marketing for the new product is not done right. Given all of the information and the corporation backgrounds, Oracle took over a company that was not able to properly package and market its product. Sun Microsystems sold out and its shareholders suffered. Sun employees also will pay the price in this corporate acquisition. Oracle shareholders will hovever see a profit, as long as the marketing and packaging of Sun products can be done correctly.
If not done properly, it could be the end of both completely. This acquisition is complete and it will be interesting to watch the future of Oracle. Bibliography Allen, Trevor. Press Release Point. 27 January 2010. 6 June 2010 . Daily Markets. Oracle takes over the Sun. 28 May 2010. 6 June 2010 . Lochlin, Stuart. Daily IT News. 7 January 2010. 6 June 2010 . Oracle CP. 28 January 2010. 6 June 2010 . Shubham. Strategic investment. 6 May 2010. 6 June 2010 . Zacks Investment Research. Oracle Takes Over Sun. 28 January 2010. 6 June 2010 .