Oracle and Sun - The morning after

(By Richard Holway 7.00am 21st Apr 09)
You will undoubtedly be swamped with news and analyst views on the Oracle/Sun acquisition. As usual, if you are short of time, read Oracle in $7.4b swoop on Sun in today’s FT for the facts.

For the ‘Views’, I guess ours are pretty close to Lex in the FT – see Oracle/Sun Microsystems:

1 - Java is an industry standard and much of Oracle’s own database software relies on it. Solaris is also widely used as a proprietary variant of UNIX. The deal really makes Oracle the middleware king. There was a huge risk to Oracle if IBM had got hold of these jewels.

2 - The deal does have the feel of an anti-Microsoft move. Well, Scott and Larry have considerable 'form' here! Our world really is polarising into a very small number of powerhouse players...and 'the rest'. As we have said so many times before, being in the middle as a mid-sized generalist is untenable. Best you can hope for is a reasonable premium for your shareholders as you become part of someone else's consolidation process.

3 – Oracle has bought at a pretty good price – just 8x anticipated earnings. But Oracle could slash costs so that Sun adds $1.5b operating profit in Year 1, $2b in Year two. That's a pretty good deal.

4 – It’s the hardware bit that bugs us. Why does Oracle want to be a hardware manufacturer? Why does it want to get into the vanilla server market? What effect is it going to have on its relationships with HP, IBM, Dell etc? (Indeed, as I was surfing for this article I was confronted with an ad of a HP computer and an Oracle Database ‘the perfect combination’!)

The FT suggests “Sun’s struggling hardware business will probably be sold on. (Cisco could be a potential buyer.)” We've even heard HP mentioned as a possible acquirer of the hardware bit - along with any number of Far Eastern companies. If that happens, we would applaud.

However, Oracle in their FAQs gives the distinct impression that selling the hardware bit is not on their mind (Well, they would say this at this stage, wouldn’t they?) Oracle makes great play of planning “to engineer a complete, integrated system – applications to disk – where all the pieces fit and work together so customers do not have to do it themselves”. But it is clearly the software bit that was the sole driving force behind consummating the deal.

I think what is less contentious, is that this is a big acquisition in our sector. I have predicted, at the beginning of the year, that 2009 will see a major surge in M&A. Indeed a major surge in mega-sized M&A; particularly 'divestments' and 'troubled assets'. All the people I speak to right now confirm this. A bottom in prices has been called (it may get a bit worse before it gets better – but nobody can that that clever). Many companies have vast cash hoards. Some investors are cash rich. If there was ever a time to use it, it is now. There were two other (non-IT) mega acquisition yesterday. Good to see companies buying when prices are low (unlike RBS who had a policy of buying when prices were at an all time high!)

We will return to Oracle and Sun again. But the message should be “Great (surprise) deal from the software viewpoint but considerably less sure on the hardware front”.