Oracle to Buy Sun for $7.4 Billion as IBM Talks End (Update2)

Oracle to Buy Sun for $7.4 Billion as IBM Talks End (Update2)

April 20 (Bloomberg) -- Oracle Corp. agreed to buy Sun Microsystems Inc. for about $7.4 billion in cash, swooping in after the server maker’s talks to be acquired by International Business Machines Corp. failed.

Oracle will pay $9.50 a share, 42 percent more than Sun’s closing price on April 17. Oracle plans to make Sun a profitable part of its business and said the purchase will add $1.5 billion to operating earnings, excluding some items, in the first year.

The takeover moves Oracle, the world’s second-largest software maker, into the market for server and storage computers, pitting the company against IBM and Hewlett-Packard Co. Oracle Chief Executive Officer Larry Ellison also gains Sun’s Java programming language and Solaris operating system, which work with its top-selling database program.

“They’re really going to zero in on just the most strategic part of Sun’s hardware business,” said Heather Bellini, an analyst at UBS AG in New York, with a “buy” rating for Oracle’s shares. “They’ll end up making the company much better run.”

Excluding Sun’s cash and debt, the deal is valued at $5.6 billion, Oracle said in a statement. Sun had about $2.6 billion in cash and marketable securities, and about $700 million in long-term debt at the end of 2008. Oracle has about $11.3 billion in cash and marketable securities.

Sun, based in Santa Clara, California, rose $2.46, or 37 percent, to $9.15 in Nasdaq Stock Market trading at 4 p.m. New York time. Oracle, based in Redwood City, California, dropped 24 cents to $18.82.

IBM Talks

IBM was in takeover discussions with Sun in the past month, offering as much as $9.40, until negotiations broke down over price and terms, according to people familiar with the situation. IBM spokesman Ian Colley declined to comment today.

Sun’s shares had gained almost 80 percent the day reports of the talks with IBM surfaced, only to drop 23 percent the day after the deal collapsed. Sun’s board voted for the Oracle deal “with enthusiasm,” Sun CEO Jonathan Schwartz said in an e-mail to employees today that was obtained by Bloomberg News.

Sun’s Java technology lets developers write programs that work across operating systems and on a variety of devices. There are about 6 million Java developers, according to Sun. The software has been installed on 800 million desktop computers and also powers 2.1 billion mobile devices.

Oracle said it relies on Java for its Fusion middleware, software that helps applications share information. Middleware is Oracle’s fastest-growing business, Ellison said today on a conference call, and is on track to be as large as the company’s database business. Oracle doesn’t break out middleware and database sales.

Java, Solaris

“Java is the single most important software asset we have ever acquired,” Ellison said. Oracle will continue to expand the Java business, he said.

Sun’s Solaris competes with Linux and Microsoft Corp.’s Windows software. While Sun offers versions of Solaris and its MySQL database program free to developers, the company makes money by selling service, support and software updates. Sun boosted software sales by 21 percent in the quarter through Dec. 28 and said in January that it projects revenue from those products to reach more than $600 million a year.

Oracle had sales of $22.6 billion in the latest fiscal year.

“Oracle has always been very good at making money out of software,” said Philip Dawson, an analyst with Gartner Inc. in London. “Sun tried to make money out of software,” with little success.

Higher Margins

Orders for Sun’s server and storage computers, accounting for more than half its revenue, are slowing as customers pare back spending on equipment during the worldwide recession. Sun has reported losses in three of the past four quarters, and analysts project another loss for the period through March.

Oracle President Safra Catz said today the company plans to operate Sun, which farms out its manufacturing and assembly to partners, at “substantially higher margins.” She declined to provide specifics. “We intend to ensure that it is a profitable operating unit within Oracle,” Catz said.

There was no mention of job cuts, a tactic Oracle has used with previous acquisitions to reduce costs. Sun had about 33,500 employees at the end of December, according to a regulatory filing. Oracle had about 84,000 workers as of May last year.

Hardware Market

In September, Oracle announced its first hardware product, a computer made by Hewlett-Packard that is pre-loaded with Oracle’s database programs. The machine is designed to make it easier for companies to add information to their networks and configure it to suit their needs.

With Sun, Oracle has its own hardware to sell to customers, some of whom are already asking for systems pre-loaded with the software they need to run their businesses, Oracle President Charles Phillips said on the call. The company may offer pre- configured servers containing programs geared to specific industries, such as retail and banking, he said.

“It remains to be seen how Oracle runs a hardware company, especially one where its market share is declining,” Shaw Wu, of Kaufman Brothers in San Francisco, said in a report to investors today.

Purchase Spree

Oracle is entering new markets as it seeks to reach $50 billion in revenue by 2012. The purchase is Oracle’s third- largest after its $10.3 billion takeover of PeopleSoft Inc. in 2005 and the $8.5 billion purchase of BEA Systems Inc. last year. Oracle has spent almost $34.5 billion on purchases since 2005 to buy 52 companies, making it the most acquisitive software company in the world.

The Sun acquisition will be more profitable in per-share contribution in the first year than Oracle had planned for the purchases of BEA, PeopleSoft and Siebel Systems Inc. combined, Catz said.