With Sun, Oracle May Be Serious About Hardware
April 27 2009 - 3:11PM
Dow Jones News
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