EU probes Oracle-Sun deal, cites open-source issue

By AOIFE WHITE , 09.03.09, 10:50 AM EDT

Over the past 13 years, Sun Microsystems' Java language has become one of the computer industry's best known brands—and underappreciated assets.

The tension wasn't lost on Sun's new owner, Oracle (ORCL), which on Apr. 20 said it will purchase Silicon Valley pioneer Sun (JAVA) for $7.4 billion in cash. If Oracle has its way, Java will emerge not only as a strong revenue source but also a key component of plans to keep customers loyal for years to come.

During a conference call with analysts on Apr. 20, Oracle CEO Larry Ellison called Java "the single most important software asset we have ever acquired." It's a bold statement from a chief executive who has spent in excess of $40 billion to buy more than 50 software companies since 2005.

Powering PCs and Cell Phones

Ellison is willing to make that call because the Java programming language, widely used to write much of the world's business software, is a key ingredient in Oracle's recipe for ensuring the many products it has already acquired work smoothly together. Java also runs on 800 million PCs and 2.1 billion mobile phones. PC makers and cell-phone vendors, including Nokia (NOK), pay royalties to license the software. "When you look at those numbers, they're enormous," Citigroup (C) analyst Brent Thill says of Java's potential. "Oracle looks at this and says, 'This could be a $1 billion business.'" Yet Java supplied just $220 million of Sun's $13.9 billion in 2008 revenue. "Java is the most valuable brand in software that has no value," says Joshua Greenbaum, principal of industry analysis firm Enterprise Applications Consulting.

Oracle hopes to wring value from the deal in part by cutting costs to make Sun's hardware and software businesses profitable. Oracle also wants to sell Sun's Solaris operating system and servers in tandem with its market-leading database software. Citigroup's Thill estimates Oracle could cut between 40% and 70% of Sun's roughly 33,000 employees. Excluding restructuring costs, Oracle expects Sun to add $1.5 billion in profit during the first year after the acquisition closes this summer, and another $2 billion the following year. Oracle executives declined to say how many jobs would be eliminated.

Buying Sun gives Oracle access to popular software it can wield against its competitors. In addition to Java, Oracle gains Solaris, widely used in industries including telecom and finance. Oracle also picks up the MySQL database, which is available free under an open-source licensing arrangement, and could help Oracle check sales of Microsoft's SQL Server database to smaller companies. "Sun is not a well-managed company," says one industry executive familiar with its business. "But it does have assets that can become lethal weapons for the one owning them."

Little Hardware Experience

But to gain those assets, Oracle also has to take on a hardware business, something it has little experience running. Ellison will have to make a success of Sun's server business, which has been losing money. Oracle has made its own forays into the hardware business, striking a deal with Hewlett-Packard (HPQ) last year to produce servers designed to provide a performance boost to Oracle databases that run on them.

Oracle to Buy Sun

SANTA CLARA, Calif. April 20, 2009 Sun Microsystems (NASDAQ: JAVA) and Oracle Corporation (NASDAQ: ORCL) announced today they have entered into a definitive agreement under which Oracle will acquire Sun common stock for $9.50 per share in cash. The transaction is valued at approximately $7.4 billion, or $5.6 billion net of Sun's cash and debt.

"We expect this acquisition to be accretive to Oracle's earnings by at least 15 cents on a non-GAAP basis in the first full year after closing. We estimate that the acquired business will contribute over $1.5 billion to Oracle's non-GAAP operating profit in the first year, increasing to over $2 billion in the second year. This would make the Sun acquisition more profitable in per share contribution in the first year than we had planned for the acquisitions of BEA, PeopleSoft and Siebel combined," said Oracle President Safra Catz.

"The acquisition of Sun transforms the IT industry, combining best-in-class enterprise software and mission-critical computing systems," said Oracle CEO Larry Ellison. "Oracle will be the only company that can engineer an integrated system - applications to disk - where all the pieces fit and work together so customers do not have to do it themselves. Our customers benefit as their systems integration costs go down while system performance, reliability and security go up."

There are substantial long-term strategic customer advantages to Oracle owning two key Sun software assets: Java and Solaris. Java is one of the computer industry's best-known brands and most widely deployed technologies, and it is the most important software Oracle has ever acquired. Oracle Fusion Middleware, Oracle's fastest growing business, is built on top of Sun's Java language and software. Oracle can now ensure continued innovation and investment in Java technology for the benefit of customers and the Java community.

The Sun Solaris operating system is the leading platform for the Oracle database, Oracle's largest business, and has been for a long time. With the acquisition of Sun, Oracle can optimize the Oracle database for some of the unique, high-end features of Solaris. Oracle is as committed as ever to Linux and other open platforms and will continue to support and enhance our strong industry partnerships.

"Oracle and Sun have been industry pioneers and close partners for more than 20 years," said Sun Chairman Scott McNealy. "This combination is a natural evolution of our relationship and will be an industry-defining event."

"This is a fantastic day for Sun's customers, developers, partners and employees across the globe, joining forces with the global leader in enterprise software to drive innovation and value across every aspect of the technology marketplace," said Jonathan Schwartz, Sun's CEO, "From the Java platform touching nearly every business system on earth, powering billions of consumers on mobile handsets and consumer electronics, to the convergence of storage, networking and computing driven by the Solaris operating system and Sun's SPARC and x64 systems. Together with Oracle, we'll drive the innovation pipeline to create compelling value to our customer base and the marketplace."

"Sun is a pioneer in enterprise computing, and this combination recognizes the innovation and customer success the company has achieved. Our largest customers have been asking us to step up to a broader role to reduce complexity, risk and cost by delivering a highly optimized stack based on standards," said Oracle President Charles Phillips. "This transaction will preserve and enhance investments made by our customers, while we continue to work with our partners to provide customers with choice."

The Board of Directors of Sun Microsystems has unanimously approved the transaction. It is anticipated to close this summer, subject to Sun stockholder approval, certain regulatory approvals and customary closing conditions.

There will be a conference call today to discuss the transaction at 5:30 a.m. Pacific time. Investors can listen to the conference call by dialing (719) 234-7870, passcode 923645. A replay will be available for 24 hours after the call ends at (719) 884-8882, passcode: 923645. A live audio webcast of the call will be made available at www.oracle.com/investor and a replay will be available for seven days after the call ends.

About Oracle

Oracle (NASDAQ: ORCL) is the world's largest enterprise software company. For more information about Oracle, please visit our Web site at http://www.oracle.com.

About Sun Microsystems, Inc.

Sun Microsystems develops the technologies that power the global marketplace. Guided by a singular vision -- "The Network is the Computer" -- Sun drives network participation through shared innovation, community development and open source leadership. Sun can be found in more than 100 countries and on the Web at http://sun.com.

In the weeks preceding Art Basel Miami Beach, many claimed that the little hiccup currently working its way through the international economy would be worst felt in the fair's social engagements, i.e., the parties that are the precise reason many fancy folk make the pilgrimage to south Florida every December. Well, if Wednesday night was any indication, those naysayers couldn't have been more wrong. Not one, not two, but three big events were on the docket: Silvia Venturini Fendi's dinner at the home of Miami Design District doyen Craig Robins, Puma's sit-down to toast its collaboration with the Rubell Family Collection on 30 Americans, and the fête that Allison Sarofim and Stuart Parr hosted at Casa Tua for Edmiston yachts (yes, apparently people are still buying, or at least looking at, yachts).

"If you're quick—in and out—you can squeeze in more than one party," said Sarofim. But being quick wasn't easy, what with the evening's many speeches. At least they were big on laughs. Raising a glass to the German shoe giant, art collector Mera Rubell said, "I love Puma. If you're going to galleries all day, you need a comfortable shoe. In fact, when people ask what you need to start a good art collection, I now always say a pair of Pumas." Back at Casa Tua, after thanking the art royals in the room (and the actual royals, if you count Princess Firyal of Jordan), Parr stood on his banquette to tell a bawdy joke involving a burka and a pear that left more than one lady blushing. Benicio Del Toro, for the record, liked it.

Sun Microsystems Inc. plans to cut up to 6,000 jobs, or 18 percent of its global work force, as sales of its high-end computer servers have collapsed.

The drastic move announced Friday highlights Sun's desperation to cut costs and survive as an independent company. Sun's shares have fallen so steeply they've crossed an ominous threshold, driving the company's market value below its cash on hand.

That means investors believe the company itself is essentially worthless. After eight years of devastating financial problems and multiple attempts at restructuring, Sun's latest woes have ramped up speculation that one of the most storied names in computing could be snapped up dirt-cheap by a bigger rival. Hewlett-Packard Co., IBM Corp., and Dell Inc. are all possible suitors.

"The magnitude of the work force reduction is certainly overdue," said Brent Bracelin, an analyst with Pacific Crest Securities.

Bracelin said the move puts Sun in a better position to return to profitability, but added that the company is facing hard questions about a possible sale or spinning off parts of the business.

Sun shares fell 2 cents to $4.06 in midday trading Friday.

The Santa Clara, Calif.-based company said the job cuts will include between 5,000 and 6,000 of its 33,000 employees over the next year. The cuts should save an estimated $700 million to $800 million annually.

Sun expects charges of $500 million to $600 million spread out over the next 12 months to pay severance and other restructuring costs.

Sun also said its software chief, Rich Green, has resigned, as the company splits its software division into three new business groups. One will handle Sun's Java programming language and open-source database offerings. Another will be responsible for Sun's Solaris operating system, which is used to run servers. The third will focus on developing programs for "cloud computing" services delivered over the Internet.

"These are hard but necessary changes," Jonathan Schwartz, Sun's chief executive, said in an interview.

He said the company has been deeply wounded by the credit crunch, because customers can't get loans to buy expensive servers. A quarter of the Sun's business comes from the ailing financial services sector.

Schwartz said the restructuring of the software division reflects the company's increased focus on open-source software, whose underlying code is available for free. Sun's strategy, which some analysts believe isn't paying off as promised, is to sell support services for that software.

Schwartz said he's pleased with the company's process in picking up new customers through its software offerings.

The company's problem is "isolated to a single line item": sales of its high-end servers, which fell 27 percent in the latest quarter to $576 million. That's a staggering shortfall for a division that contributes a quarter of Sun's overall revenue. Sun's sales last year were nearly $14 billion.

"Across the board we feel great about our direction," Schwartz said.

Breaking up the business units also serves another purpose: it packages them nicely for possible spinoffs or sale, analysts said.

Sun's share price gives the company a market value of roughly $3 billion. Yet at the end of September, Sun had $3.1 billion in cash on hand. The gap indicates extreme pessimism about the company's prospects.

Sun posted a loss of $1.7 billion in the latest quarter, largely because it wrote down the value of the business by $1.45 billion.

At the height of the dot-com boom, Sun's stock price, adjusting for splits since then, topped $250 per share. The company was riding strong sales to Web startups and boasted that its servers "put the dot in dot-com," a catch phrase that became a punch line after the meltdown when Sun's sales shriveled.

The company has done several rounds of big layoffs in the last three years. Sun has cut 2,700 jobs since August of last year in two separate restructurings. The company had previously cut about 4,000 jobs after Schwartz took over as CEO from co-founder Scott McNealy in 2006.