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— Analysis —
Not only did the company's $7.4 billion bid to acquire server and storage system maker Sun Microsystems Inc. surprise most observers when it was announced last month, but it left many wondering what Oracle's plans are for the various pieces of Sun after the deal closes this summer.
Perhaps the biggest question is this: What will Oracle, the largest business software developer in the world, do with a company that derives more than 90% of its revenue from hardware? Ellison's company, after all, generates an operating margin of around 45% from its multiple software lines, a figure most hardware makers can only dream of. Some have wondered whether Oracle will sell off hardware assets, a valid question. After all, Ellison has said several times he has a vision of a market where servers based on the Unix operating system become commoditized. One skeptic of the deal, Toni Sacconaghi of Bernstein Research, argues that this sentiment is "inconsistent with acquiring Sun, a company that generates the vast majority of its revenue from high-end Unix servers and associated software and services." But here's the thing: As brash and aggressive as Ellison and his team of dealmakers might seem, few can disagree with Oracle's ability to strike big acquisitions and meld them into its corporate structure in a surprisingly cohesive fashion. Certainly, buying Sun is a different kind of deal than the $6.8 billion purchase of BEA Systems in late 2007, or even its largest deal, the $10.3 billion acquisition of PeopleSoft Inc. in 2005. There are obvious pluses to buying Sun. Oracle's Fusion middleware, which stitches together software applications, runs on Java, the programming language that Sun invented. Ellison calls it "the single most important software asset we have ever acquired." Solaris, the server operating system, is the top platform for Oracle's database software. And although many of Oracle's plans for Sun's business lines are still unclear, the company's track record has encouraged many observers to give Ellison the benefit of the doubt when it comes to the hardware part of the equation. "Right now I'm thinking Larry is pretty sly," says Nathan Brookwood of consultancy Insight 64. Brookwood argues that Ellison holds the view that customers have a fixed amount of money to spend on expensive servers and storage equipment and the software applications that run on them. "With lower-cost hardware, you can get more money for your software," Brookwood says. "By having Sun in his portfolio, Ellison could use its hardware as a loss leader to sell more software." This runs opposite to the acquisition-driven push Sun conducted over the past couple years to use software to sell its hardware -- a strategy that failed to lift the company from the rut it fell into after the dot-com crash decimated demand for its servers early this decade. While Sun is not a market leader in hardware, pursuing an aggressive pricing strategy on its hardware could take market share away from its big rivals, which include Dell Inc., Hewlett-Packard Co. and IBM Corp. -- which had reportedly been close to striking a deal to buy Sun before Oracle swooped in. Other questions linger about Sun's fate inside of Oracle. As part of the deal, Oracle gets MySQL, a database management company that Sun paid $1 billion to acquire last year as a key part of its push to inject software into its product mix. MySQL's open-source software has nibbled at the margins of Oracle's own flagship proprietary database product. While Oracle says it will add MySQL to its suite of database products, some observers expect the product to stagnate within the confines of its new owner. If that happens, chalk it up to Ellison's penchant for eating the competition. Even if it remains unclear exactly what Oracle has in store for Sun's various business lines, the company will have in its possession -- and will be able to keep out of the hands of rivals -- critical assets. And it will take some of them to a higher level than Sun ever could, says Yankee Group Research Inc. analyst Zeus Kerravala. "Java is finally going to be owned by a real software company that knows how to cater to developers, and Solaris will be important if Oracle wants to be strong in data center infrastructure as well as applications," Kerravala says. "Larry Ellison hasn't made too many bad bets, and I don't think this will be one of them." |
Part of being a successful business leader is keeping everyone guessing. Whatever one may think of Oracle Corp. CEO Larry Ellison, of his penchant for multimillion-dollar yachts, jetfighters, feudal Japanese mansions or gobbling up competitors, he's got this piece of corporate acumen down pat.
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