Oracle 'Wins' Sun in Ricochet Romance

Oracle has announced plans to buy Sun Microsystems for $9.50 per share in cash in an overall value of $7.4 billion, or $5.6 billion net of Sun's cash and debt. The stated purpose is to combine the companies' respective enterprise software and mission-critical computing systems. Larry Ellison is quoted as saying, "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."

PR-speak aside, there are a few obvious tactical reasons for Oracle's pursuit and Sun's enthusiastic acquiescence. Simply put, Oracle wanted to acquire Java and Solaris. Rightly enough, Oracle considers Sun's Solaris operating system the leading platform for the Oracle database and sees opportunities in optimizing its database solutions for some of Solaris's special, high-end features. Oracle's focus on Java is considerably more strategic: Though it leverages Java heavily in its own Fusion platform, Oracle likely sees the Java partner/user ecosystem as one with enormous, if untapped, potential. Whether Oracle will be able to make Java more of a commercial success than Sun did is anyone's guess at this point.

That said, the deal carries nearly as many challenges as it does opportunities, particularly in the way Oracle's myriad system vendor partners -- now its competitors -- handle the news. Not about to burn any partner bridges (publicly, at least), Oracle vowed its continuing commitment to Linux and other open-systems platforms while stating that it will enhance its strong industry relationships. Oracle's support of its partnerships is a good idea as they are the primary source of the company's core revenues.

Beyond Oracle's entrance into what, by any measure, is likely to be a tricky competitive landscape, the deal highlights numerous questions and issues. Sun has reportedly been on the market for many weeks now, with IBM reported as the leading suitor. Oracle may have had only a couple of weeks to look at Sun prior to the deal's announcement, and it is worth asking whether the due diligence that can be undertaken let alone completed in such a short time will be adequate to the task. Oracle may have simply decided that any potential problems should simply be dealt with later or written off, but whatever the case the announcement appears to have been rushed.

The fact that Sun was on the block at all suggests that its problems made the company as much a turnaround candidate as one for acquisition. Why? This could be the subject of a lengthy discussion, but suffice it to say that Sun's scale-up systems' heritage made it difficult for the company to adapt effectively to the burgeoning market for scale-out systems. In addition, one of Sun's strengths -- its laser-focus on its traditional business model -- crippled the company's ability to deal with changing market conditions and opportunities. Witness Sun's handling or mishandling of the tape business that it acquired in the purchase of StorageTek.That is an issue that made the reported interest of IBM in Sun so intriguing. IBM has long demonstrated the ability to manage multiple business models simultaneously and possesses a long string of successful acquisitions used to supercharge a host of its own offerings. The company also has the breadth and depth of management skills across hardware, software, and services to have worked effectively across all of Sun's product and service organizations. The picture with Oracle is a good deal less clear, largely because the company has been extremely successful with just one software-centric business model. This is not a bad thing -- no one castigates Wal-Mart. However, Sun's systems-focused business model is likely to leave Oracle guessing in areas where success depends on clarity.

Numerous acquisitions aside, Oracle has not demonstrated that it can manage a second business model and is not likely to have the skill sets necessary to evaluate which of Sun's businesses should be saved, sold, or abandoned. Some have suggested that Oracle can rely on Sun's existing management team and board members to help, but if they were truly able why did they miss the opportunity to turn around the company? Going outside to bring in turnaround managers is a tricky business, particularly when you are dealing with a workforce that needs to hear some good news in the very worst way.

IT acquisitions tend to fail more often for cultural than technological reasons -- witness HP and Compaq, among others. Some Oracle/Sun boosters have suggested that the companies' cultural similarities -- citing their West Coast heritage and long-time collaboration as examples -- certainly outweigh Sun hooking up with an East Coast company like IBM. While there is some truth to that point, it ignores the immense gap that typically exists between hardware and software cultures. Under CEO Jonathan Schwartz, Sun has been something of a software vendor in training. One can only hope that Larry Ellison and crew are equipped to provide greater guidance and inspiration.

Overall, the proposed Oracle/Sun deal offers more questions than it does answers. For example, what should be done about Sun's StorageTek business? Can it be sold (and, if so, who would want to buy it), should it be spun off or closed? Speaking of storage, Sun sells LSI Logic-based disk in the midrange and HDS-based disk at the high end. How does that square with Larry Ellison's a long-time investment in Pillar Data? How will an R&D heavy group like the UltraSPARC organization fare under Oracle's cost-conscious managers? And what about MySQL and Oracle's less-than-stellar open-source record?

At the end of the day, enterprise IT customers tend to regard two things above all others: reliability and predictability. Related to this, it can take very little uncertainty for a business to shift allegiance if it feels a trusted vendor has lost its way, and numerous competitors stand to gain when and where Oracle and Sun lose. For that reason, we would urge Oracle and Sun to state their relative plans and positions as quickly and clearly as possible. The companies certainly owe it to their shareholders, customers, and employees. However, if they hope for their proposed deal to succeed, they also owe it to themselves.Charles King, President and Principal Analyst for research firm Pund-IT Inc. , focuses on business technology evolution and interpreting the effects these changes will have on vendors, their customers, and the greater IT marketplace.

– David Hill is principal of Mesabi Group LLC, which focuses on helping organizations make their complex storage, storage management, and interrelated IT infrastructure decisions easier by making the choices simpler and clearer to understand.

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