Oracle (NASDAQ: ORCL), one of the world's most dominant proprietary database providers, today announced it has reached a definitive agreement to acquire Sun Microsystems (NASDAQ: JAVA) for approximately $7.4 billion, or $5.6 billion net of cash on Sun's balance sheet. This deal may come as a surprise to many (stock market reaction indicates such with Oracle down, Sun up) and we see a number of issues from the deal.
Just this past Thursday night at an "ideas dinner" hosted by Monness Crespi, a boutique research-focused investment firm, I told the group of my concerns for Oracle's stock price as it looked like they were heading toward more challenging times. The negative read comes from the obvious macro-economic concerns but moreso given Oracle's maintenance pricing and a lack of acquisitions of size to help pump up reported growth.
Sun is one of the few deals of size left to help augment the growth challenges and the company's PR seems to support this notion as the focus of the transaction: Oracle's official press release is in line with the margin concerns, saying "We expect this acquisition to be accretive to Oracle's earnings". Acquisition accounting helps and existing Sun users will add to top line growth to an extent; but the other issue I raised, operating margin pressure, will likely be exacerbated by the hardware-centric Sun wares. For the IANS client end-users in particular, Oracle will likely welcome the Sun IAM solution to augment its earlier acquisitions including Oblix and Thor. Converting the overall Sun model to Oracle's benefit, however, may prove far more complicated.
Oracle was quoted by the Wall Street Journal as calling Java the "most important software" it has ever acquired. This may be true - Java is a dominant platform by most any measure, and the java.com site suggests 6.5 million developers powering more than 4.5 billion devices. But as for money-earning software, Java and most of Sun’s offerings don’t bring much to the table, at least relative to the overall revenue picture. Maintenance is growing for the key Java and MySQL support lines but we question the rate of growth. And how will Oracle deal with the conflict of support for a free database versus a licensed form?
Sun has given away the bulk of its software offerings in an effort to bolster its hardware pricing. This never made sense to us (please see “The Big Blue Horizon Comes for Sun”). But now Oracle will be in control and this will be interesting to manage from the software buyer's seat. As Oracle has kept to its 28% maintenance charges (on list price!), the margins have risen steadily to the 40%+ levels - ahead of almost any provider and Oracle has said they think 50% is attainable. This doesn't strike us as a company looking to discount.
On the brighter side for end-users, in prior large deals like Peoplesoft Oracle has not pulled a CA EOL game - end-of-lifing of applications forcing users to upgrade at a higher cost. In fact, Oracle has absorbed acquisitions as well if not better than most of its competitors. The MySQL open source database play presents a very interesting debate - how much will Oracle push an offering that directly undermines its core database business? Oracle has acquired open source DB wares before but of much smaller scale and with little fanfare. We have seen Oracle make some small inroads into accounts with its security suite, but given the company's overall focus the very cautious security buyer has not heavily swum to Redwood Shores for shelter. Sun can help here directly.
So for end-users, Oracle certainly is not any major fear from the technology perspective. It's your CFO who's going to be nervous...
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