Tuesday, April 21, 2009

Oracle Said to Pounce on Sun After IBM Negotiations Collapsed

Oracle Corp., after talking with Sun Microsystems Inc. for several months, seized its chance to buy the company when negotiations with International Business Machines Corp. ended two weeks ago, people familiar with the matter said.

Sun, the fourth-largest maker of server computers, accepted a $9.50 a share offer from Oracle after weeks of haggling with IBM. Sun and Oracle signed a confidentiality agreement on April 10, and Oracle Chief Executive Officer Larry Ellison announced the $7.4 billion acquisition yesterday.

IBM had offered as much as $9.40 a share for Sun before the pair broke off talks about two weeks ago, according to accounts of the negotiations. IBM, the world’s largest computer-services provider, was concerned about the price and the cost of change- of-control provisions in some Sun executives’ contracts, according to a person familiar with the matter. Sun needed more assurances that IBM would push the deal through to completion, according to another person.


“It’s not unlike Oracle and Ellison to come in after some deal has been announced, to come in and steal the bacon,” said Peter Falvey, co-founder of Boston-based investment bank Revolution Partners.

IBM, based in Armonk, New York, is unlikely to counter Oracle’s bid, according to a person familiar with the matter.

Edward Barbini, a spokesman for IBM, declined to comment, as did Oracle’s Deborah Hellinger. Shawn Dainas, a spokesman for Santa Clara, California-based Sun, also wouldn’t comment.

Sun Surges

Sun rose $2.46, or 37 percent, to $9.15 in Nasdaq Stock Market trading yesterday. Oracle, based in Redwood City, California, dropped 24 cents to $18.82.

Oracle, the world’s second-largest software maker, has spent more than $34.5 billion on 52 acquisitions since 2005 to expand sales and enter new markets. Ellison said yesterday he’s buying Sun for the Java programming language and Solaris operating system. Oracle may also sell Sun servers and Oracle software in a single package.

“It created a nice opportunity for Oracle to step up,” said Michael Shinnick, a fund manager at Wasatch Advisors Inc. in South Bend, Indiana. The firm manages about $4.5 billion, including Oracle and Sun shares. “There may be a heck of a revenue opportunity there for them.”

Oracle said Sun will be one of the most profitable acquisitions, bringing in $1.5 billion in operating earnings the first year.

‘Technology Titans’

Sun co-founder Scott McNealy said the deal with Oracle combines “two technology titans.”

“Sun and Oracle have been pioneers and partners for way longer than I like to think about, over 20 years,” McNealy said on a conference call with Ellison.

If Sun accepts a competing offer, it will have to pay Oracle a termination fee of $260 million within two days, Sun said yesterday in a filing.

IBM, the world’s biggest seller of technology services, reported first-quarter revenue yesterday that missed analysts’ estimates amid shrinking demand for computer services and hardware. IBM Chief Financial Officer Mark Loughridge said on a conference call that Oracle’s acquisition doesn’t change the market.

“We’ve been competing with Sun -- we know Oracle inside out,” Loughridge said. “They now have the same address and the same mailbox, but we’re talking about the same team that we’ve been competing against for some time and winning.”

Unix Market

If IBM had bought Sun, the two would have controlled more than half of the market for high-end servers powered by the Unix operating system. Sun accounted for 31 percent of that market by revenue last year, compared with IBM’s 35 percent, according to research firm Gartner Inc. in Stamford, Connecticut.

There is no such hardware overlap between Sun and Oracle, which leads the market in sales of database software. Oracle held 42 percent of the database market in 2007, followed by IBM, with 24 percent, according to Gartner. Sun’s database program, MySQL, had less than 1 percent, Gartner said.

Oracle’s purchase of Sun will probably attract far less antitrust scrutiny than a deal with IBM, said Evan Stewart, an antitrust lawyer at Zuckerman Spaeder LLP in New York.

“They will look at this as something that will help Sun survive,” Stewart said. “Having stronger companies competing across a broader spectrum of computer hardware and software markets can only be viewed by the regulators as a good thing.”