Slimmer Sun Can Pay for Oracle
HEARD ON THE STREETAPRIL 20, 2009, 3:55 P.M. ET
By MARTIN PEERS
Jerry Yang must be wondering where Larry Ellison was when he needed him.
Sun Microsystems shareholders should be grateful for Oracle's $9.50 a share bid, a price close to what IBM was once expected to pay for Sun. Mr. Ellison has rescued Sun shareholders from the stock-price oblivion suffered by Yahoo since Mr. Yang failed to seal a deal with Microsoft.
The challenge for Mr. Ellison is to ensure the deal -- costing Oracle $5.6 billion, net of cash -- makes as much sense for his own shareholders. That's no slam dunk. Not only has Oracle diversified for the first time into hardware, a lower-margin business than software, but it's acquiring a company whose hardware business is under intense competitive pressure.
Of course, Mr. Ellison is more interested in Sun's software, particularly its Java brand and the Solaris operating system, which he described as "instrumental" in the decision to buy Sun. Oracle's Fusion Middleware is built on top of Java while Solaris is the top operating system for the Oracle database.
Ensuring the two software products don't fall into the hands of an Oracle rival is valuable, although not a benefit that necessarily justifies the price of the deal. Software, after all, is a minority of Sun's business, accounting for only about 7.5% of its products revenue last year. Nearly 40% of Sun's revenue comes from services but much of that is also hardware related.
Cost cutting can make the deal pay. Mr. Ellison predicted Sun would contribute more than $1.5 billion to Oracle's operating profit in its first year. Given Sun's relatively low operating margins, there's no doubt plenty of fat to cut in areas like sales and marketing. Were that Yahoo were so lucky.
