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The Impact of Oracle-Sun

An in-depth analysis of the $7 billion-merger reveals its potential to reshape the IT vendor ecosystem.

By Bruce Guptill, Saugatuck Technology

May 06, 2009

In the early hours of April 20, Oracle Corp. announced that it had reached an agreement to acquire Sun Microsystems for $9.50 per share. The announced price was slightly more than the $9.40 per share that IBM was said to have offered Sun earlier in April. The $7.4B deal values Sun at approximately 50 cents on the revenue dollar.

We cannot emphasize this enough: Oracle buying Sun changes the shape of the IT industry, in effect creating a new, full-line hardware, software and services Master Brand - the first since the merger of Sperry and Burroughs to create Unisys. The IT landscape will be forever changed as a result.

The Rationale Behind the Deal
The match of Sun with Oracle is not surprising. Sun has had a strong relationship with Oracle for many years. And Sun has been known to be seeking a buyer and/or major investors for at least three years, most visibly earlier this year with IBM.

But as we have noted in published research over the years, the Sun deal is the latest and largest iteration in Oracle's acquisition-centered growth strategy to become an ever-more-influential IT Master Brand (see Research Alert RA-197, "Oracle Acquires Siebel as Master Brand Strategy Emerges," 14 Sept. 2005; and Strategic Perspective MKT-328, "Oracle-Hyperion: Saugatuck Impact Assessment," 14 March 2007).

And while Sun is first and foremost a hardware vendor, the key for Oracle is Sun's software business. Oracle Chairman Larry Ellison specifically mentioned in a Monday conference call that Sun's Java programming language and Solaris operating system were the main attractions for Oracle. Ellison labeled Java as "the single most important software asset we have ever acquired."

Saugatuck agrees, especially as regards Java. In addition to being a de facto industry development standard, Java is also key to Oracle's own software development, from database to applications to middleware. As influential as Oracle has been in software markets, the acquisition of Sun and Java places Oracle in a central, core role when it comes to software industry direction.

Oracle also gains significant presence and influence within open source movements and communities. Along with IBM, Sun has been one of the two most visible and influential IT Master Brands in open source. Sun has not only championed and promoted open source software development and its inclusion into commercial software, it has opened Java, acquired MySQL and its LAMP-stack-standard open source database, and opened the Solaris operating system. Oracle has long seen the opportunity inherent in both using open source in its own offerings and in influencing the growth and direction of open source software development (see Strategic Perspective EVT-287, "Will Oracle Kill Open Source? The Bold Move Against RedHat and the Future of Enterprise Open Source," 30 Oct. 2006).

While Sun's Solaris operating system is often seen as a "non-growth" OS, (see Research Alert RA-183, "Sun Opens Solaris Source Code - But Will That Help?" 16 June 2005) it has a significant presence in several key vertical industries worldwide, specifically financial services, government, academia, and high-performance computing. Thus Oracle adds to its presence and influence in several IT markets that so far are seeing continued growth through the global recession.

Oracle of course gains significant revenues and market presence well beyond Sun's software business. While accounting for losses and shifts between operating groups obscures the bottom line somewhat, Sun's annual server and storage hardware revenues are estimated at between $7B and $9B, with storage growing while servers remain relatively flat. While Sun has so far been unable to turn around its flagging hardware businesses, they are still quite substantial in terms of revenue and market presence and do present significant revenue opportunities if managed effectively. Storage in particular is a booming business that should add to Oracle's bottom line.



Beyond being existing lines of business with impressive revenues and unrealized potential for profit, Sun's server and storage businesses - along with its substantial professional services business - provide Oracle with significant opportunities to develop and refine a very broad and powerful set of components for the emerging Cloud Computing environment. Sun's servers and storage, Solaris operating system, Java development environment, and open source community power - and Sun's annual $2B R&D spending - can be key building blocks for many SaaS and Cloud Computing services and providers. Sun's hardware presence and experience in data center outsourcers should position Oracle well as regards Cloud-based IT compute and storage offerings and providers.

In short, Oracle is positioning itself as a portfolio business, diversifying its holdings into profit centers it can manage in different mixes under differing economic conditions. In many regards, this is similar to the business models employed by IBM, HP, and now Cisco - building a range of revenue portfolios based on technology business units that have synergy and can be invested in as conditions dictate. Saugatuck sees this as a key reason why Oracle was willing to pay marginally more for Sun than was IBM: Oracle needed Sun to round out their portfolio of offerings. "Oracle will be the only company that can engineer an integrated system - applications to disk - where all the pieces fit and work together so customers do not have to do it themselves," Oracle's chief executive, Lawrence J. Ellison, said Monday. While it remains to be seen if Oracle can enable such seamless integration, Ellison's statement certainly supports Saugatuck's position.

The Market Impact
As we stated above, Oracle buying Sun changes the shape of the IT industry and forever alters the IT landscape.

As a result, there are no guarantees that the deal will be approved by US or overseas regulators. Any acquisition of this size and broad impact on multiple markets is likely to undergo exacting regulatory scrutiny. Regulators may even require divestiture of some portions of the combined firm in order to reduce its potential for anti-competitive positioning and behavior. Hence it is not a certainty, for example, that Oracle may be able to hang on to Sun's hardware or services lines of business, or that it will be able to profit long-term from MySQL or other key aspects of Sun's software business - although our bet is that Oracle will have an easier time than IBM would have, if IBM had succeeded in its pursuit of Sun.

Even so, we see massive changes in the IT industry and among user firms as a result of this deal, including the following:

For Oracle: Whether Oracle digests Sun, transitions its businesses within the context of Oracle's strategic vision, or re-organizes based upon Sun's synergies, strengths and challenges, the new Oracle will be a far more diversified portfolio with:


As a result, many of Oracle's strategic relationships have to change. More flexibility and a wider range of offerings in a diversified portfolio will make Oracle a more formidable competitor to Cisco, HP, IBM, and Microsoft. After years of "friendly" competition in several areas with IBM Software Group, for example, Oracle now becomes a full-fledged, direct competitor.

There is no assurance that Oracle will succeed as a full-line vendor. The company will be challenged by having no previous strategic hardware expertise, and practically no services management experience. Ellison's broad-reaching statements about integrative solutions aside, Oracle has little to no experience integrating and managing services and hardware into a portfolio. Such changes bring massive and broad challenges in customer relationship management, R&D, sales, support, compensation, and more. Such challenges could push Oracle management to sell off some or all of its new hardware lines to Cisco, Dell, EMC, Fujitsu, HP, IBM or Lenovo. And while it can be argued that Oracle is in acquisition mode, not divestiture mode, regulatory influences may force some divestiture.

Should Oracle retain its new server and storage lines, and successfully integrate them with software and services into a coordinated portfolio, it can be expected to become a major player in SaaS and Cloud Computing. We would expect to see Oracle continue as a key supplier (some would argue as a key "arms dealer") of backbone / platform technologies, as well as moving into Cloud platform and services provision itself.

On the open source front, Oracle becomes, practically overnight, a dominant power and influence. If it can manage this position effectively, Oracle should see significant reductions in development costs and timeframes. This may even help boost Fusion, if Oracle can use its stronger open source influence to get key development communities involved. And given the increasingly dominant presence of commercial software vendors in open source (see Strategic Research Report SSR-540, "Power, Speed and Assimilation: Open Source Changes the Industry, and the Industry Changes Open Source," 18 December 2008), Oracle also in effect adds to its user communities, channels, market influence, and the overall direction of open source software in general.



For Sun: While Oracle will likely retain the Sun brand for the foreseeable future, the acquisition should, effectively, put to rest the executive presence and influence of both Chairman Scott McNealy and CEO Jonathan Schwartz. Neither have been able to improve or maintain Sun's dominant position in user and provider data centers. Schwartz has been in a difficult position as McNealy's nominal successor, and reportedly had championed and driven acquisition negotiations with IBM. McNealy likely bows out as well. He is known to have been good friends with Oracle's Ellison as long as they were complementary firms, but the two have also been rivals. And history indicates that such strong "founder" personalities are unlikely to work well together over the long term.

We see a period of instability for Sun and its customers during the acquisition process and for at least a year following the closure of the deal. Sun customers and partners will endure typical acquisition "hiccups."

In the long term, however, Sun hardware customers are likely to endure significant challenges. Again, there is no indication at this time that Oracle would divest itself of the Sun hardware business, but that possibility must be considered. We do expect Oracle will use the SPARC/Solaris business as a cash cow over time. Oracle may also strive to gain a foothold in the x86 server business, but, they have significant challenges somewhat similar to those faced by Cisco (see Strategic Perspective Cisco UCS: Bid to Change the x86 Paradigm, MKT-580 03-31-09).

For MySQL: Saugatuck sees MySQL fitting well into the expanded Oracle portfolio. Most often positioned as a web server engine rather than a database for massive transactional environments, MySQL should continue to be the de facto web server db engine. We see it as unlikely to be more than that for Oracle, and expect to see it promoted, sold, and managed as a niche/"other" product, until Oracle either fully incorporates it into its existing db line, or develops a replacement offering.

For IBM: The advantages of acquiring Sun were not quite as clear for IBM as they are for Oracle. However, we do believe that IBM would have been able to profit significantly from a Sun deal.

We also believe that IBM missed an opportunity to contain Oracle growth and protect its own presence and investments in software, services, storage and servers. At a sale price of approximately 50 cents on trailing 12-months revenue, IBM had an opportunity to acquire several lines of business that would have mostly complemented its existing LOBs, cemented its development influence, expanded its open source influence, and increased its bottom line.

Acquiring Sun would also have boosted IBM's nascent Cloud Computing efforts, as Sun is now expected to do with Oracle. Basically, IBM enabled Oracle to become more of a full-line threat. IBM also allowed strategic uncertainty into IBM's own revenue stream, as IBM has been the largest reseller of Oracle software worldwide. This of course works both ways; Oracle has to deal with the same strategic relationship and revenue stream. It is unlikely that the two firms will be unable to negotiate a revised, mutually-beneficial relationship. But it is possible that IBM could have prevented the need for such if it had acquired Sun.

There were of course significant questions about how, and if, Sun offerings would fit within IBM's already-successful portfolio, operations and relationships. IBM may have seen the costs of such challenges as too much to justify the Sun acquisition. Passing on the Sun deal only re-emphasizes that IBM may be getting gun-shy / cautious about taking down significant acquisitions that could reinforce or help transform their business. In the case of Sun, it could have helped strengthened IBMs push in toward the Cloud. And IBM was rumored to have been outbid by Cisco for Webex, which could have acted as a key catalyst to substantially strengthen and grow IBM's SaaS and collaboration businesses.

For SAP: Oracle's organizational focus on making this deal happen should help SAP in its ongoing battle for enterprise applications position against Oracle, at least in the short term. For example, Oracle Sales and Channel organizations' focus for several months will be on learning about, and then integrating, Sun portfolios into Oracle's universe. We can expect varying levels of distraction and some loss of focus on Oracle customer accounts as a result. Where significant Oracle business app accounts are up for renewal or planning expansion, expect SAP to pull out all stops.

For HP, Dell and other hardware vendors: This is a game-changer for server and storage vendors that have partnered with Oracle in the past to develop solutions and channels. For example, Oracle's new position as a hardware vendor could hurt HP's server business, which enjoys significant success through its Oracle alliance program. The good news for HP (if there is any), is that they are better off having Oracle buy Sun than IBM.

For Users: The next several months will constitute one of the largest periods of uncertainty seen among IT buyers and users for many years. The Oracle-Sun acquisition affects all aspects of IT. We are not suggesting that user IT groups put all their plans on hold. But we do suggest that Sun hardware and software customers wait until they receive specific information and guidance from both Sun and Oracle as to the future of their installed bases. As it is by no means clear what will happen with Sun's server and storage businesses, for example, it would be prudent to postpone any significant investments in new hardware from Sun until such reassurances are delivered. In the mean time, we expect that EMC, HP, IBM, Fujitsu, and other server/storage providers will take advantage of this uncertainty, and aggressively market themselves to Sun customers.


Bruce Guptill is a Managing Director for Saugatuck Technology, responsible for research strategy and operations. This Research Alert was originally published to Saugatuck Technology research recipients on April 22, 2009. It is republished here at the request of SandHill.com.

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