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On April 20, 2009, Oracle and Sun announced that they have entered into a definitive
agreement through which Oracle would acquire Sun common stock for $9.50 per
share in cash. The transaction is valued at about $7.4 billion, or $5.6 billion net of
Sun’s cash and debt. The deal, which would need to be approved by Sun
stockholders and by federal regulators, is expected to close by summer, 2009. Sun’s
business has a run-rate of more than $13 billion annual revenue, and Oracle has an
annual run-rate of about $22 billion.

This deal was made in Silicon Valley, based on the longtime relationships not only
between Oracle and Sun, but also between Oracle CEO Larry Ellison and Sun
chairman Scott McNealy. It is likely that this is just a first step, and once the deal
closes there will be a series of additional steps about which businesses to keep as
standalone units, and which to combine with existing offerings. Certainly, Oracle has
put forward the idea that holistic server-based solutions would be extremely useful to
customers, combining a technology stack of standalone products—hardware,
operating system, database, middleware, and applications—all of which the combined
Oracle and Sun could offer.

Given its weeks of negotiations to buy Sun for a similar price—which was reported to
be nearly $7 billion, or between $9 to $10 per share of Sun—IBM is very likely to be
extremely frustrated with this deal. This is particularly true on the Java front because
now Oracle will control the destiny of Java—and IBM will not—and because Java is
an important leverage point for Internet computing, which underlies much of IBM’s
middleware stack (e.g. IBM WebSphere, IBM Domino). IBM may have become
convinced that Sun simply didn’t have any other options when IBM-Sun talks broke off
in early April. However, the geometry of Silicon Valley relationships, which have
brought the computer industry adaptability for many decades, seem to have surfaced
in this deal.

In many ways, the current economic downturn is bringing about this IT industry
inflection point, as vendors prepare for the next wave. The deal comes at a time of
industry transformation, where technology convergence (servers, storage, software,
networking connections, and services) is re-making the enterprise data center—and
changing the way service providers deliver business value to their end-customers,
either directly, or through cloud computing. Oracle said that it is considering building
end-to-end technology stacks, leveraging Sun’s servers, storage, and software, along
with Oracle’s database, middleware, and applications software—but it is too early in
the acquisition process to predict what form this will take.

The biggest question will be the ultimate status and positioning of Sun’s various
hardware businesses—servers, storage, and tape. Although not an immediate
problem, with respect to government approval of the deal, ultimately the combined
company would have to rationalize the hardware business. Possible moves include
spinning off the tape business as a separate business unit and figuring out how to
market Sun’s server and storage products, possibly as part of integrated solutions.
These server and storage businesses compete directly with those of HP and other
server OEMs—all of which partner with Oracle for database, middleware, and
application software. Further, Oracle is already partnering with HP to deliver an all-inone
data warehouse solution, called Oracle Exadata, built on HP ProLiant x86
servers and the Oracle Database.

Key Take-Aways from the Deal

Key take-aways from the Oracle acquisition of Sun include the following:
???? Oracle is looking to ensure the survival of Java and its open-source development
technologies. Further, as a strategic matter, this acquisition assures that neither
IBM nor Microsoft would acquire and control future development of Java. Since
Oracle is highly dependent on the continued relevance of Java, moving into the
role of custodian gives it an added measure of control. However, in this new role
Oracle will need to communicate and demonstrate to the Java community that its
democratic roots will be preserved and that the Java Community Process (JCP)
will be improved, with more input from committee members.
???? The deal places Java in a company that values it for the ability to run applications
on any platform, which is especially important in enterprise computing. Oracle’s
interest would be to continue the Java franchise—and to foster the Java
community worldwide—and IDC expects that Oracle will do whatever it takes to
maintain the momentum of Java, both for the enterprise, and for the Javaenabled
Internet handset and cell business smart clients.

– Next-generation datacenter deployments will require side-by-side deployments of
multiple operating systems on virtualized x86 server infrastructure. Oracle has
always been focused on cross-enterprise deployments on platforms running a
variety of operating systems (e.g. Linux, Unix, Microsoft Windows, IBM z/OS, and
others). In a virtualized datacenter, having Solaris and OpenSolaris (a form of
Unix) and Linux running side by side, will not be problematic and can be viewed
by Oracle as a definite plus as well as a counterweight to Microsoft.

– Oracle’s business application stack, Oracle Fusion middleware, and Oracle
Database products (including Oracle RAC) already run on all of Sun’s software
platforms, so no change in operating systems support will be needed following
acquisition. Oracle’s strong push behind Linux, via its leverage of Red Hat Linux
software as the basis for Oracle Virtual Machines (OVM) hypervisor, and as a
preferred platform for Oracle Real Application Clusters (RAC), would need to
accommodate a nuanced positioning, where Solaris and Linux would be seen as
two important operating environments for next-generation enterprise data centers.

– IDC notes that Sun has interesting software assets across the software
landscape: in infrastructure (e.g. the ZFS file system for storage, GlassFish for
developers and software appliances); database (MySQL), and development tools
(NetBeans). MySQL could be viewed as an additive product, bringing customers
who deployed both MySQL and Oracle databases—and those who have not
deployed Oracle. However, there is some overlap in the middleware space, and
IDC believes Oracle will carefully evaluate which products should go forward,
and which should converge, over time, with Oracle middleware products.

Conclusion

Oracle said it will run Sun as a profitable business unit, implying that there will be
organization and operational changes. In this sense, the merger could be viewed as
the end of an era—when a 1982 start-up, Sun Microsystems, grew to an improbably
large $20 billion run-rate during the Internet boom and Y2K preparations of 1999-
2000. Following the dot.com bust of 2001, Sun never regained that level of business
and profitability. Ultimately, Sun was forced by economic conditions, and tightening IT
budgets, to seek a buy-out, because the sale opportunities and the company itself
were shrinking. If the deal is approved, Oracle would capture the large Sun installed
base, estimated to be at least 1.6 million actively used servers worldwide (including
RISC servers and x86 servers). IDC believes that Oracle is in a position to leverage
much of Sun’s intellectual property (IP). What’s not clear is the fate of specific Sun
products, including the M-Series systems, that are manufactured by Fujitsu Ltd., and
SPARC CMT-based systems, such as the Niagara rack-optimized and blade systems.
This deal to some extent redraws the lines of competition in the IT space. For many
years, there was a comfortable detente between the creators of value at the
Hardware, Operating System, Database, Middleware, and Application levels. While
there were occasional border wars and alliances, there was generally peace—or at
least clear segmentation between those businesses. Now, in a time of technology
convergence, the rules are changing. We have already seen that with recent
announcements from Cisco, HP, IBM, Dell, and others. With the stroke of a pen, the
combination of Oracle and Sun can deliver chips to applications, and everything in
between, but the exact shape of this combined technology offering is yet to be
determined. While this structure may not stay in place, as is, it will usher in a different
basis for competition, one where customers are offered far more integrated platforms,
and service providers deliver all-in-one Internet-enabled services, directly, and via the
cloud, and where competition between past partners is far more common.