Oracle Corp. (ORCL) hopes buying Sun Microsystems Corp. (JAVA) will "Sparc" up its business.

Last week, Oracle, a database giant with little experience in hardware products, surprised investors when it said it would pay $7.4 billion to buy server maker Sun.

Among the key appeals of Sun: servers based on its Sparc chips, a favorite of many of Oracle's big database customers. The deal will instantly transform the Redwood City, Calif., company into the fourth-biggest company in the $53 billion server market.

The big move into hardware represents an important development in Oracle's growth strategy. By acquiring companies like PeopleSoft Inc. and Siebel Systems Inc., Oracle has become the world's largest maker of enterprise software, the programs companies use to manage everything from sales to human resources data. Now, it is aiming to branch out into the platform those programs run on, as well.

"Oracle sees this as an opportunity to complete the portfolio," says R "Ray" Wang, an analyst at research boutique Forrester.

Oracle is betting its customers will want to buy high-end servers from the same company that makes the software running on them. That model has worked for International Business Machines Corp. (IBM), which sells both computers and the software.

The company also hopes it can integrate Sun's software - the Java programming language, Solaris operating system, and MySQL database - into its own portfolio of programs. That will boost the range of products Oracle offers and allow them to use Oracle's own servers to host some of their computing.

Software accounts for roughly 10% of Sun's $14 billion in annual revenue. The Santa Clara, Calif.-based company is scheduled to report earnings on Tuesday.

"Integrated computer systems, hardware and software, should be very profitable," Oracle Chief Executive Larry Ellison said on a conference call announcing the deal. An Oracle spokeswoman decline to comment further.

Already, investors seem to like the deal. Though Oracle shares fell on the day it was announced, they've since rebounded 3.6%. Oracle said the deal will be accretive in its first year, though analysts estimate it will compress margins, currently at 46%, by around 10 percentage points.

Many observers think Oracle shouldn't be getting into the hardware at all, and some have suggested Oracle will sell Sun's shrinking business - it has 9.3% of the server market, down from 10.6% in 2007 - the first chance it gets.

Sparc servers have lost ground to servers based on Intel Corp.'s (INTC) x86 chips. Oracle will have to pour money into research and development to keep Sparc servers relevant, an investment that could dilute margins further. Research firm Gartner warned customers to be wary of buying Sun hardware until Oracle has articulated its hardware plans.

"Oracle has to say it's committed to hardware now to maintain customer confidence," said Rick Mammone, an engineering and business professor at Rutgers University. "But there's no reason to hold onto a very low margin, competitive unit where they have little operational experience."

Indeed, Oracle may sell some of Sun's low-end servers, if only to reduce margin dilution, analysts say. But it will likely want to keep some of the hardware portfolio. That's because in addition to offering a complete package to customers, Oracle understands Sun's customers and their needs well.

Many of Sun's servers run on the Solaris operating system, for which Sun charges maintenance fees to keep up to date. Those fees are a little less than a quarter of Sun's $14 billion in annual revenue. That's a model Oracle understands well: About half of its $22.4 billion in revenue from maintenance fees for its software.

Oracle will certainly have to work hard to convince customers and investors it can be successful in this new market. But the company has a strong track record with acquisitions: The roughly $30 billion of companies it's bought since 2005 have fueled both top-line and earnings growth. With its rigor and customer focus, it could become a serious player in hardware.

-By Jessica Hodgson; Dow Jones Newswires; 415-439-6455; jessica.hodgson@dowjones.com