UPDATE:Oracle, With Sun Micro Buy, Steps Into Ring With IBM, H-P
April 20 2009 - 4:37PM
Dow Jones News
Oracle Corp.'s (ORCL) unexpected $7.4 billion agreement to buy
Sun Microsystems Inc. (JAVA) launches the software giant into a
ring already featuring tech heavyweights International Business
Machines Corp. (IBM) and Hewlett-Packard Co. (HPQ).
The purchase would enable Oracle to offer a complete package of
information technology products for all of businesses' tech needs.
At the same time, though, getting into the hardware business could
irritate long-standing partnerships, hurt Oracle's margins and test
management's ability to fight an uphill struggle in an industry
other than software.
For those reasons, some think Chief Executive Larry Ellison may
not keep Oracle in the server game. "I don't think Ellison wants to
be in the hardware business," Bob Gill, an analyst with TheInfoPro,
said. "The hardware business is lower-margin."
On the software side, Sun delivers a number of attractive
assets, such as Java, the Solaris server operating system and MySQL
open-source database - assets that Oracle may not have wanted to
let slip into rivals' hands.
"We are positive that Oracle never wanted to get into the
hardware business but when faced with the likelihood of IBM owning
Sun's Java assets and the company's installed customer base, Oracle
was forced to buy Sun," said Peter Goldmacher, an analyst with
Cowen & Co.
For its part, Oracle sounds committed and excited by the
merger's prospects. "Oracle is now able to make all of the pieces
of the technology stack," Ellison said on a conference call
Monday.
Dana Gardner, principal analyst at Interarbor Solutions, said
the combination of Sun's hardware and operating systems with
Oracle's business software and sales force creates a powerhouse
that has the clout to serve as a global counterweight to IBM.
"This was a tectonic shift," he said.
Gardner said that while Sun had developed a line of commodity
servers to complement its high-end boxes, it lacked the software
and sales force to break into new accounts. Those products will now
be pushed by Oracle's disciplined sales force as part of the
company's integrated solutions, a strategy that could allow Oracle
to secure higher hardware margins than Sun was able to do.
"This is Oracle climbing in the ring with IBM and H-P," said
Martin Reynolds, vice president at Gartner. "Enterprise IT is going
to consolidate, and (Ellison) is just taking his share of it."
Reynolds said the deal raises questions about whether Oracle
might take additional steps to build or acquire a services arm that
will rival IBM's global consulting business.
The move also enhances Oracle's presence in cloud computing, the
term for performing computer functions off site; Ellison has yet to
embrace the concept.
"You'll see Oracle get to move from the passenger to the driver
seat in cloud computing," said Eric Openshaw, U.S. technology lead
at Deloitte LLP.
H-P will continue to provide Oracle software customers with its
storage, servers, outsourcing and services products, a
Hewlett-Packard spokeswoman said. "We look forward to strengthening
our already strong partnership," she added.
Risky Move
Sun, though, also lumbers the Redwood City, Calif.-based company
with a lower-margin hardware business at a challenging time for the
industry. The market for corporate servers is expected to decline
in 2009 compared with 2008, according to research firm IDC, and
Sun's hardware products are losing market share to the lower-end
servers based on Intel Corp.'s (INTC) X86 chips.
The server industry is dominated by giants IBM and H-P, with the
potential of Cisco Systems Inc. (CSCO) joining soon. Oracle has
limited experience selling hardware. Sun is the world's fourth
largest maker of servers.
There are also concerns about the effect of mixing sales of
Sun's servers, which have a low profit margin, with Oracle's much
more profitable software business. Tim Klasell, with Thomas Weisel
Partners, noted that Oracle's operating margins, currently around
46%, will likely fall to around 35% in the first year after the
merger, although they are expected to rise later.
A Sun/Oracle tandem also could muddy many crucial business
partnerships. To be sure, the world of IT hardware sales is quite
tolerant of competition among companies with sales partnerships.
But because of both companies' size, a duo of Sun and Oracle could
create confusion among Oracle customers that major rivals could
quickly capitalize on.
For instance, Kaufman Brothers analyst Shaw Wu said H-P, the
world's No. 2 server seller, and No. 3 Dell Inc. (DELL) both have
partnerships to sell Oracle's database software.
"Now that Oracle does servers, do they still partner?" Wu
said.
Peter Falvey, co-founder of investment bank Revolution Partners,
said that in IT infrastructure markets, "all these traditional
lines have started to blur," forcing companies to become more
diversified.
"It's a really hard market if you are just selling boxes,"
Falvey said.
Dell and IBM declined to comment for this story.
-By Jessica Hodgson, Dow Jones Newswires; 415-439-6455;
jessica.hodgson@dowjones.com
(Scott Morrison, Ben Charny and Jerry A. DiColo contributed to
this report.)