Last May, I congratulated Oracle on its brilliant move to usurp a potential acquisition of Sun by IBM, but also expressed doubts about whether the Sun acquisition was actually worth $7.4 billion. At this juncture, I am now certain that Oracle's bid is too high.
Since May, the Oracle-Sun acquisition has survived U.S. Department of Justice antitrust scrutiny, but yesterday the European Commission (EC) issued a statement of objections to the deal, focusing largely on concerns that Oracle's acquisition of MySQL, an open source database owned by Sun, might hobble or eliminate a key competitor to Oracle's own database offerings. Meanwhile, consider these points.
- Oracle estimates that the EC delay is costing Sun about $100 million per month in lost sales;
- Sun just announced that it needs to lay off 3,000 more employees as part of a restructuring plan to stem the above-mentioned losses. As Sun continues to lose people, Oracle's plan to keep the company's hardware business alive becomes more complicated. By laying off employees, Sun is losing valuable talent that will be needed to drive products to market;
- IBM and Hewlett-Packard are having a field day migrating Sun users to their respective Unix architectures. According to published reports, HP has migrated at least 100 Sun customers to its platforms over the past six months. IBM claims to have migrated over 5,000 Sun and HP customers to its Power platforms over the past four years; and,
- Oracle has stated publicly that it expects the Sun acquisition to be accretive to its earnings by at least 15 cents on a non-GAAP basis in the first full year after closing ($1.5 billion in year one, and over $2 billion in year two). We believe that Oracle will need to spend at least a billion dollars to make the Sun Sparc line competitive with other architectures, impacting or threatening the projected valuation of the deal.
Combine the losses due to the EC delay with the loss of Sun engineering and sales talent, the mass migration away from Sun platforms, and Oracle's earnings goals, and there is no way this deal is worth Oracle's $7.4 billion original bid.
Oracle's four options for Sun assets
Given these complications, we believe that Oracle now has four options.
- Continue with its acquisition plans and fight the EC (or negotiate in order to gain approval of the Sun plan). Then proceed on its path to become a hardware/software/services provider.
- Continue with the acquisition plan, but once Sun is acquired, sell off non-strategic Sun assets in order to meet its accretive goals.
- Restructure (renegotiate) the acquisition deal to reflect the previously described market changes; or,
- Withdraw from the Sun deal altogether.
If Oracle chooses to continue with its Sun acquisition plan, Oracle would likely provide new guidance on the effect that the Sun acquisition is to have on its earnings in the near and long term. In fact, Oracle's investors and the broader market should demand it do so. We suspect that Oracle will be hard-pressed to show that it can meet its current revenue estimates.
If Oracle chooses to abandon the acquisition, I see no recovery plan that will save what remains of Sun. Sun's assets will be sold off over time, thousands of people will lose their jobs and Sun customers will be left in the lurch, scrambling to find new platforms for their applications and databases. Numerous historical precedents for a collapse of this nature already exist -- do a search on "Wang Laboratories" to observe what happens when a computer company tubes.
As Sun's assets are sold off (provided that Oracle backs out of the deal or chooses to sell off assets after acquisition), I see the potential for the following scenarios.
Sun's hardware business can be separated into three entities: Sparc/CMT servers, x86-based servers and storage.
Sun's Sparc/CMT business probably has very little value given current migration trends away from Sparc/CMT platforms (maybe Fujitsu can pick up Sparc/CMT development for a song and try to keep these architectures alive). Further, massive investment will be required over time to enable Sun's Sparc/CMT architectures to stay competitive with IBM Power and Intel Xeon (8-way and beyond) microprocessor architectures.
Sun's x86-based platforms are excellent. Cisco's x86 blades are mediocre. There is a potential match for Sun's x86 product lines at Cisco.
Sun's storage products would have been an excellent match at Cisco, except that Cisco just structured a deal to work with EMC and VMware on storage virtualization and cloud packaging. So where Sun's storage business will end up is anybody's guess. One candidate could be Intel (which should have entered the storage business a long time ago). Sun's new Thumper systems and next-generation, solid-state disk technologies will definitely be of interest to storage vendors as well as some systems vendors.
Sun infrastructure software products
Sun has some excellent infrastructure software assets, especially in virtualization and provisioning, which could readily find a home with other suppliers (Symantec comes to mind, and VMware and Microsoft could both benefit from some of Sun's more advanced virtualization/provisioning products, as could Dell). In fact, Sun's network and systems management software portfolio, as well as its infrastructure products, could be used to significantly strengthen Dell's existing management portfolio.
Sun's Solaris (Unix) operating environment has been on the decline for years on Sun Sparc, but does well as the default Unix environment on x86. If this OS could find a home on other hardware, it may have some value. But, considering that Unix is a declining market, it is doubtful that Solaris will find a new home. Perhaps Chinese hardware manufacturers might be interested in Solaris, but given that the U.S. federal government (particularly the military and the intelligence agencies) do about $1 billion in business annually with Sun, a sale of this business to China might not go over well.
A variety of old and new applications (Open Office, remote desktop, etc.) actually have value to Oracle, and should remain in Oracle's portfolio. MySQL should be offered to the open source community in a manner similar to what IBM did with Eclipse, and appropriate write-offs should be taken by Oracle.
Control of the Java language environment should belong to the open source community or to standards organizations. Putting Java into Oracle's hands creates a risk for the Java movement, as Oracle could tweak Java to its own benefit at the exclusion of others or price it such that other vendors would have to pay Oracle large sums of money to use Java in their products.
As we observed in May, "Oracle will not get $7.4 billion worth of value out of its Sun acquisition in the near term." Given the current state of the EC's objections, mass migrations of Sun customers, extensive layoffs and revenue losses at the company, we now believe it is increasingly unlikely that Oracle will achieve its stated investment goals in the longer term.
Oracle's acquisition of Sun needs to be reconsidered, redone, renegotiated or rejected.
ABOUT THE AUTHOR: Joe Clabby is president and founder of Clabby Analytics, an IT research and analysis firm. He has over thirty years of IT experience.
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