Can Oracle make sense of Sun's hardware?

Planned $7.4B acquisition of Sun would thrust software vendor into the server business

When Oracle Corp. agreed to buy Sun Microsystems Inc. today, it took a leap into the hardware realm. And so the obvious question is: Can the software-centric database and applications vendor succeed with Sun's hardware business?

"I'll hand it to Larry Ellison: That man can shop," said Laura DiDio, an analyst at Information Technology Intelligence Corp., a research and consulting firm in Boston. "This deal is very, very complementary for Oracle. It gives them instant credibility with hardware, virtualization, open source, storage and cloud computing."

(Editor's note: InfoWorld's Neil McAllister predicted this acquisition last week in a blog post headlined "What if Oracle bought Sun Microsystems?" Also, see this story from late March: "Reporter's notebook: Sundown for Sun?")

Industry acquisitions in the tech realm and elsewhere, however, are filled with stories that begin with promising credibility and end in anything but. Compaq Computer Corp.'s purchase of the former minicomputer giant Digital Equipment Corp. tops that list. And for Oracle, adding Sun's technologies to its collection means stepping into fields where it hasn't been before, namely hardware.

Even though Sun's hardware sales have flagged ever since the dot-com bubble burst earlier this decade, the company's servers still have a massive installed base, said Chris Ingle, consulting director for market research firm IDC's European systems group. That will give Oracle a good opportunity to convince those customers to upgrade to new systems in the coming years. "There's a lot of money there," Ingle said. "There's a lot of loyalty there."

There's also a history of Sun's Solaris operating system and Sparc servers being the leading platform for Oracle's database. And tightening that relationship is appealing, "especially after the next generation of hardware comes out," said Andre Preoteasa, director of IT at alcoholic beverage company Castle Brands Inc. "I would think the hardware would be optimized for Oracle databases, or at the least [there would be] the possibility of Oracle troubleshooting the hardware in addition to the software."

But Oracle's vision of a seamless flow from the hardware to an operating system to applications may be harder to realize because businesses often use heavily customized applications, and it's rare that a few appliances and accompanying software are ready to go to work out of the box, Ingle said. That integration is also where vendors make most of their money, he noted.

Whether Oracle can succeed in the hardware fray depends on how it proceeds with Sun, DiDio said. "Sun may have had marketing problems over the last several years, but they have excellent technology and superior support," she added. "If Oracle leaves the technology alone — like Hewlett-Packard did with Compaq — [and] if they let Sun be Sun, they should be able to thrive. What you wouldn't want to see Oracle do is scatter its energies."

It's too early to tell exactly what Oracle will do with Sun, but Forrester Research Inc. analyst Ray Wang said that "despite skepticism, Oracle has made prior acquisitions work from a financial perspective, with year-over-year quarterly profit growth that has generally been well above 20%."

Part of the reason for that success, according to Wang, is that Oracle has two former investment bankers among its top corporate ranks. "Oracle has one of the best post-merger integration teams in the business," he said. "Oracle has been able to add new companies and their stream of revenues while keeping costs down."

Indeed, Oracle has been on a buying spree for the last several years, acquiring high-profile software companies such as BEA Systems, Siebel Systems and PeopleSoft, with the latter deal also bringing it ownership of the former J.D. Edwards.

Oracle today agreed to pay $9.50 per share, or a total of about $7.4 billion for Sun. Just two weeks ago, Sun rejected a buyout offer from IBM, saying its price of $9.40 per share, or about $7 billion, was too low. At the time, many industry analysts speculated that Sun would struggle to find another buyer and ultimately could be forced to agree to a much lower price.

"What's amazing is the elasticity, the speed with which Sun shifted from one suitor to another," DiDio said. "That was faster than Madonna."

Jeremy Kirk of the IDG News Service contributed to this report.

This story, "Can Oracle make sense of Sun's hardware?" was originally published by InfoWorld.

Copyright © 2009 IDG Communications, Inc.

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