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Oracle to buy Sun for $7.4 billion

Information technology company Oracle Corp. announced April 20 it is buying Sun Microsystems Inc. in a cash deal the company valued at $7.4 billion, after IBM abandoned its bid to buy the networking equipment maker.

Redwood Shores, Calif.-based Oracle reportedly will buy Sun shares for $9.50 each in cash. Net of Sun’s cash and debt, the transaction is valued at $5.6 billion, Oracle said.

Oracle supplies enterprise and other software to universities, colleges, school systems, and other, mostly large organizations, while Sun is a major vendor of server computers, data storage machines, and business software.

The deal could pose a new challenge to Microsoft, because Sun has been one of the key promoters of OpenOffice, a free, open-source alternative to Microsoft’s Office software.

Sun founded the project in 2000, and has been the primary contributor of new computer code to the software. Oracle could now take on that role as part of its broader efforts to challenge Microsoft.

Educators who may not be too familiar with the two companies are likely to recognize Java, an open-source programming language that Sun invented. Software developers use Java to build web sites and programs for cell phones and other devices. Java-based computer updates, which come from Sun, presumably would now come from Oracle if its deal for Sun is completed this summer as the companies expect.

Java is one of the computer industry’s most widely deployed technologies. Oracle Fusion Middleware, Oracle’s fastest growing business, is built on top of Sun’s Java language and software.

Industry analysts also predict that with the purchase, Oracle will have direct and immediate access to Sun’s hardware, putting the company in a position to develop cloud computing through Sun’s cloud computing infrastructure.  Cloud computing uses remote servers, instead of users’ PCs, to run programs and deliver services.

IBM is involved in multiple cloud computing initiatives, including one at North Carolina State University (see "Cloud Computing: The Economic Imperative").

"The acquisition of Sun transforms the IT industry, combining best-in-class enterprise software and mission-critical computing systems," said Oracle Chief Executive Officer Larry Ellison in a press release.

IBM had offered to buy Sun for $9.40 per share, but acquisition talks fell apart earlier this month. Sun balked at the price and canceled IBM’s exclusive negotiating rights, leading IBM to withdraw its offer.

Oracle expects the purchase to add at least 15 cents per share to its adjusted earnings in the first year after the deal closes. The company estimated Santa Clara, Calif.-based 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.

Sun, despite billions in sales–$13.3 billion over the last four quarters–has not been able to turn a consistent profit, losing $1.9 billion in the same period.

Despite its long-running financial problems, Sun’s customer base is loyal: Market research firm IDC estimates that there are more than 1.6 million active Sun servers in use worldwide.

"Sun has a wealth of technology and intellectual property," said Jean Bozman, a research vice president with IDC. "You have to look at Sun in a three-dimensional way. It provides hardware, it does servers and storage, it has software–it has all these elements that would go into the next-generation data center, not just one or two. And it has historically been on the leading edge of technological trends."

Analysts have long contended the company couldn’t stand on its own, and many were skeptical the company would be able to find another buyer after talks with IBM broke down.

The IBM talks may have been derailed by antitrust issues because the two companies overlap in several areas. In tape-based data storage, for example, together IBM and Sun would hold 52 percent of a $3.1 billion market.

The companies had been working out the terms of a commitment from IBM that it would see the deal through even if antitrust regulators raised objections.

The deal with Oracle may not be hampered by the same antitrust issues, because there is significantly less overlap between the two companies. Still, Oracle would be able to use Sun’s products to enhance its own software systems.

"Oracle and Sun have been industry pioneers and close partners for more than 20 years," said Sun Chairman Scott McNealy in a press release. "This combination is a natural evolution of our relationship and will be an industry-defining event."

The transaction has been approved by Sun’s board of directors, and Oracle expects to close the deal this summer.

Shares of Sun jumped $2.46, or 36.8 percent, to $9.15 in premarket activity while shares of Oracle fell 68 cents, or 3.6 percent, to $18.38.


Sun Microsystems

Sun’s Cloud Computing Infrastructure

Oracle Corp.

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