Oracle to buy Sun for $7.4B after IBM drops bid

SAN FRANCISCO -- Oracle orcl gobbled up Sun Microsystems java for $7.4 billion Monday, boldly swooping in to take advantage after IBM dropped its bid to buy one of high-tech's best-known — and most-troubled — companies.

The startling deal, Oracle's first hardware acquisition, steps up Oracle's bid to become a one-stop technology shop for more than 300,000 corporate, government and academic customers. It also effectively ends Sun's 27-year history as Silicon Valley's maverick independent.

"With the acquisition of Sun, Oracle is now able to make all of the pieces of the technology stack fit together and work well," Oracle CEO Larry Ellison said in a conference call Monday.

Though far from Oracle's biggest acquisition in a four-year shopping spree that has cost more than $40 billion, it could be the most strategic.

Oracle could deftly use Sun's products to enhance its own software. Sun's Java programming language is used to develop applications for websites, mobile phones and even DVD players. Sun's Solaris operating system is a leading platform for Oracle's database software.

Java is the "single-most-important software asset we have ever acquired," Ellison said.

Sun CEO Jonathan Schwartz predicted Oracle will be able to offer its customers simpler computing solutions at lower prices by drawing on Sun's technology.

Under the deal, Oracle will pay $9.50 in cash for each Sun share.

IBM offered just a dime a share less, but acquisition talks withered this month in a squabble over price and the extent to which IBM was willing to see the deal through an antitrust review. A deal with Oracle likely won't face the same antitrust hurdles because there is far less overlap between the two companies. The merger requires approval from the Justice Department and European Union.

IBM, which reported a sharper-than-expected 11% drop in first-quarter revenue and slightly lower profit Monday, had no comment on Oracle's early-morning surprise.

Sun shares soared 37% to $9.15 in trading Monday. Oracle slipped 1% to $18.82. Just a few weeks ago, Sun shares were less than $4.

The acquisition can't come soon enough for Sun, many analysts say. Despite $13.3 billion in sales over the past four quarters, Sun lost $1.8 billion in the same period.

Given its failing financial fortunes, some analysts had argued that the onetime tech darling couldn't survive on its own. For that reason, primarily, analysts said Monday that they aren't shocked to see Sun boomerang so quickly into Oracle's waiting arms.

"From Sun's perspective, this is a good deal," says Andy Butler, a vice president at Gartner. "This is as good as they were going to get."

But is it a good deal for Oracle? At $7.4 billion, Oracle is paying slightly more than IBM offered, but in the end that might not matter, says Dave Novosel, a tech analyst at Gimme Credit.

Why? Despite the current global shake-up in the tech sector, Oracle has a strong balance sheet and deep cash reserves. As a result, he says, the Sun deal probably won't have much of an impact on Oracle's bottom line.Unlike most of its tech brethren, Oracle has successfully stitched together a series of acquisitions into a cohesive business-software dynamo the past few years.

Oracle estimates Sun will contribute more than $1.5 billion to Oracle's adjusted profit in the first year and more than $2 billion in the second year.

If Oracle can hit those targets, Sun would generate more profit than the combined contributions of three other major acquisitions — PeopleSoft, Siebel Systems and BEA Systems — that cost Oracle north of $25 billion.

But those gains could come at a loss of jobs.

Some of Oracle's earlier buyouts have yielded significant layoffs. In Monday's conference call, Oracle didn't discuss how the deal would affect jobs. Oracle employs about 86,000 people worldwide, while Sun has about 33,000 workers. It's possible that job cuts this time will not be as severe because the companies' products are complementary.

Sun has been for sale for several months, and a raft of companies expressed interest, according to a source close to the talks who declined to comment on the record because the discussions were confidential. Nothing was serious, however, until IBM went public with its overture.

Oracle showed interest in Sun's assets several weeks before the two sides started formal negotiations late Thursday, the source said.

A potential Oracle-Sun partnership underscores the rapid rise — and long fall — of Sun.

The company was founded in 1982 by Stanford University MBAs Scott McNealy and Vinod Khosla; Bill Joy, whose work formed the basis for Sun's computer operating system; and Andy Bechtolsheim, a grad student whose computer workstation for the Stanford University Network led to the company's first product. Bechtolsheim developed the workstation because he was tired of waiting for computer time on the central university system.

Led by the outspoken McNealy, Sun preached the idea that PCs could do more when lots of them are networked. The concept caught on at universities and in the government and became a key cog in the development of the Internet.

By the 1990s, Sun became a star of the Internet boom. It claimed to put "the dot in dot-com," considered buying then-struggling Apple and watched its market value peak around $200 billion.

Along the way, Ellison and McNealy, who is now Sun's chairman and former CEO, became fast friends because their companies worked together to take on rivals Microsoft and IBM.

Yet Sun was slow to react when the bottom fell out in 2001. Its premium products, built on Sun's proprietary systems and its own microprocessors, were sideswiped by less-expensive rivals that used industry-standard technologies such as Intel chips and Microsoft software. Sun lost more than $5 billion in the first five years after the tech bubble burst.

Higher costs for consumers?

Even more problematic for Sun, the company was reluctant to sacrifice its independence, even as it hemorrhaged billions of dollars.

It remains to be seen how the competitive landscape will be affected by the Sun-Oracle combination. Microsoft officials warn the deal could add complexity and cost for some customers, a notion disputed by several analysts.

In addition to Microsoft, Vivek Ranadive, CEO of Tibco Software, a business-software company that competes with Oracle, thinks the deal will complicate things and be more expensive for customers.

One thing is clear, analysts say: Expect a shake-up.

"This is going to place a degree of competitive pressure on other vendors, including IBM," says Butler. Companies "will have to recalibrate their relationship with Oracle. ... This is going to have a big bearing on the industry, no doubt about it."

The biggest impact, of course, will be on Oracle. And the fallout could be significant, says Ray Wang, a vice president of Forrester Research.

Thanks to the worldwide economic meltdown, big companies have been trimming their information technology (IT) budgets — used to cover the cost of new hardware, software, servers and such. By joining forces with Sun, he says, Oracle will be better prepared to do battle against IBM and other vendors.

"At the end of the day, for Oracle, this is about getting a shot at the IT wallet," he says.

History will ultimately judge how big the missed opportunity was for IBM. The computer giant balked, in part, because of regulatory concerns: Sun and IBM both have big positions in the computer server segment.

Though IBM worried the overlap wouldn't sit well with antitrust regulators, Wang, for one, thinks that wouldn't have been a big hurdle. IBM's loss is all the more poignant "when you consider that Oracle only offered slightly more than what IBM was offering," he says.

"IBM missed a nice opportunity," Wang says.

Swartz reported from San Francisco, Cauley from New York.