Oracle's $7.4 billion acquisition of Sun Microsystems has major implications for the high-tech world that will unfold in the months ahead. There is already plenty of speculation about how the merger will position Oracle to compete and plenty of optimism about what this megamerger means for the high-tech industry in the midst of a global crisis.
A couple of things are certain:
Innovation is a likely fruit of the acquisition. By acquiring Java's programming language, Oracle can explore continued innovation and investment in Java technology that will benefit its customers and the industry.
And with the acquisition of the Sun Solaris operating system, Oracle can optimize its database with new features.
"Sun is a pioneer in computing, and this combination recognizes the innovation and customer success the company has achieved. Our largest customers have been asking us to step up to a broader role to reduce complexity, risk and cost by delivering a highly optimized stack based on standards," said Oracle President Charles Phillips. "This transaction will preserve and enhance investments made by our customers, while we continue to work with our partners to provide customers with choice."
Oracle's End-to-End Strategy
The merger represents a bold strategic vision and will be truly transformative for Oracle, according to Murray Beach, managing director of TM Capital, a leading investment bank. By acquiring Sun, Beach said, Oracle is evolving from a leading provider of enterprise applications to a full-service provider of IT systems on par with IBM.
Beach said Oracle and Sun have been strong strategic partners for years, and there are many reasons the combination makes sense. He said the merged company will be able to pitch customers with the , the operating system, the middleware, the database, and the servers necessary to roll out new system deployments.
By centralizing the development of Oracle's software with Sun's Solaris, Java and other products, the combined company should be able to produce cohesive systems with superior performance and lower implementation and integration costs, Beach said. He noted that while acquisition rumors focused on hardware suitors such as IBM, Hewlett-Packard or Dell, Oracle is the lone software vendor with which a deal truly makes sense because of the Java and Solaris connections.
How Will Cope?
"Neither Red Hat nor Microsoft should be happy about these developments. Red Hat, which has been a rumored acquisition target for Oracle for quite some time, must now be a lower priority within Oracle's strategic vision," Beach said. "Microsoft, which has been slow to gain traction with large customers, may have been elbowed out of the enterprise market by this move. With both IBM and Oracle now offering end-to-end IT systems, Microsoft may find it challenging to climb the ladder from its traditional SMB focus to larger enterprise sales in which it can only offer the software component of a broader system deployment."
From a financial perspective, Beach said the announced purchase price implies an attractive premium. The $9.50 per share offer is 42 percent more than the previous day's closing price and a 91 percent premium over the company's value before the IBM acquisition rumors began.
"This deal proves that despite current economic conditions, acquirers are still willing to pay significant premiums for strategic assets. Also, despite the size of the premium paid, this deal is expected to be highly accretive to Oracle," Beach said. "The fact that Oracle paid a sizable premium but can also project significant earnings accretion shows that there are real bargains are out there for buyers who want to take advantage of the depressed valuations in today's equity markets."