One of the more surprising episodes in Hewlett-Packard and Oracle's ill-fated enterprise IT partnership was touched upon for only a few minutes during testimony in their breach-of-contract trial earlier this week. But that event -- fruitless talks aimed at a joint acquisition and breakup of Sun Microsystems -- may have been one of the sources of their current rancor.
Ann Livermore, an HP board member and the former head of the company's enterprise business, briefly discussed the companies' unrealized idea during cross-examination by Oracle's attorney in Santa Clara County Superior Court, in San Jose, California, on Tuesday. Before Oracle made its successful US$7.4 billion bid for Sun in April 2009, it talked with HP about buying the troubled server and software company together. Under that plan, Sun's hardware assets would have become part of HP and its software would have gone to Oracle.
HP also considered acquiring Sun on its own, an idea it ultimately dropped, partly because it had seen Sun's server sales decline, according to Livermore. But the surprising scheme to buy Sun in a three-way deal with Oracle might have made sense at the time, industry analysts say. And it wouldn't have been so surprising prior to 2009, because the companies were close then. The deal might have prevented the game-changing acquisition that turned the cozy partners into major competitors: Oracle's takeover of all of Sun, including its enterprise server business.
Now HP is suing Oracle, saying it breached a contract by ending software development for future versions of HP's Itanium chips. Oracle has countersued, accusing HP of lying and defamation.
How the deal might have helped
A joint acquisition would have allowed both companies to strengthen their core businesses of the time, which were complementary, industry analysts said.
"Dividing it up would have made sense, especially since HP at that point didn't really have a great interest in or great assets around software," said analyst Charles King of Pund-IT. For large enterprises, HPs greatest interest was in supplying high-availability Integrity servers from its Business Critical Systems (BCS) division to run customers' software, much of which came from Oracle. Taking over Sun's server business would have helped it do so.
"In one fell swoop, HP could have coalesced a sizable [portion], if not a very large majority, of Oracle's database customers within its Business Critical Systems," King said.
But the current weakening of the BCS business proves that that wouldn't have solved all of HP's problems, according to King. HP says BCS revenue declined significantly last year, mostly because of Oracle's announcement in March 2011 that it would stop porting its database and other software to new versions of the Itanium chip at the heart of the Integrity servers. HP may have foreseen that it had to get into software too, King said.
"HP had to recognize at the time that simply being a hardware foil for an increasingly powerful software player like Oracle was not going to play well in the long term for the company," King said. Its reliance on Oracle has eroded its very autonomy as a company, he said.
But Oracle might have been perfectly happy with a three-way deal that left it with Sun's software assets, including the MySQL open-source database, the Solaris OS and the Java programming platform, and none of the hardware. There is some evidence that Oracle hasn't been happy with the servers it got in the Sun acquisition.
A July 28, 2011, instant-message conversation between two Oracle executives, uncovered in the discovery process for the trial, hinted Oracle was struggling to sell the newly acquired Sun servers. The IM exchange included several statements denigrating Sun hardware.
"We bought a dog," wrote Keith Block, executive vice president of Oracle's North American sales and consulting organizations.
"Nobody wants to sell Sun. It baaaalllllooooows," Block wrote.
"Pig with lipstick," Oracle human-resources executive Anje Dodson responded.
"From a long-term strategy standpoint, HP probably made the right decision," King said. "That may have put a crimp in Oracle's plans. That could have been the beginning."
As strange as it may be to imagine a joint acquisition by two companies now at each others' throats in court, HP and Oracle might have been able to pull it off when current Oracle co-President Mark Hurd was still running HP and Oracle wasn't building servers. That was also before HP hired Executive Chairman Ray Lane and short-lived CEO Leo Apotheker, both longtime enemies of Oracle and its brash CEO, Larry Ellison.
"Mark was great with Larry. ... They had a great relationship," said Ray Wang of Constellation Research.
Even if the two companies did have a falling out over the joint Sun buyout, that probably wasn't the fight that doomed their relationship, Wang said. Even now, there are many reasons for them to keep cooperating.
"There's not a single point of failure. ... A number of factors have driven this war between them," Wang said. "The chips have laid out this way, which is very surprising."
In any case, Oracle's solo purchase of Sun has worked out well for it, and HP will be left at a disadvantage if it doesn't start to beef up its software assets, Wang said.
In just the past few years, the value of a hardware business by itself has declined, according to Wang. Cloud computing has made infrastructure a commodity, and those building clouds prefer to buy hardware and software as a package rather than integrating them and keeping them in sync as they evolve, Wang said.
Because it bought all of Sun, Oracle is well positioned to offer those kinds of packages, he said. Its Exadata database and Exalogic application systems now have integrated software and storage, computing and networking hardware made by Oracle.
However, no one wins it all, as evidenced by the outcome of another lengthy trial that ended just in May about an hour's drive north of the San Jose court. Late last month, a federal judge in San Francisco ruled that the Java APIs (application programming interfaces) used in Google's Android OS are not eligible for protection under U.S. copyright law. A jury earlier had cleared Google of patent infringement in the case, which Oracle plans to appeal.
"The assumption at the time was that whoever bought the company was going to have a gold mine in Java, and that hasn't actually worked out very well," Pund-IT's King said.
Additional reporting by Chris Kanaracus in Boston.
This story, "HP and Oracle, now headed for a split, could have split up Sun" was originally published by IDG News Service .