Oracle-Sun acquisition a 'bold stroke'

NEW DELHI, INDIA: Springboard Research has put together a detailed report—Focus Point, Oracle to Buy Sun- Bold Stroke or Bridge Too Far?, that analyzes the impact of Oracle's acquisition of Sun Microsystems, with a specific focus on the Asia-Pacific region.

The report encompasses the impact of the acquisition on the key Asian markets like China, Australia, India, etc. It also gives ten key observations on acquisition.

Like all acquisitions, the success of the Oracle and Sun marriage will depend on integration and execution. If it is executed correctly, it will change the dynamics of IT in substantial ways, from partner-based selling to end-to-end stacks. Nevertheless, Oracle will encounter stumbling blocks if integration and execution falter, concluded Springboard.

10 key findings:

1) The IT industry landscape has just been fundamentally altered

By any measure or calculation, it is clear that this acquisition will reverberate throughout the global IT industry. The combined company has annual revenues in excess of $35 billion, making it one of the largest and most diversified IT companies in the world. The implications for customers, competitors and channel partners are going to be systemic and permanent.



2) Oracle’s long-term commitment to hardware is questionable

Oracle has operated as a software business since its inception, and diving into the hardware market will bring a myriad of new challenges. This is especially true considering the challenges that drove Sun to pursue acquisition partners so actively over the past year.

If Oracle decides to retain Sun’s hardware operations in the long term, there are many questions about how successfully the company will be able to compete in this market.

3) The data center is a new battleground

Long dominated by IBM, HP, Dell and Sun, the data center market now has two new formidable competitors in Cisco and Oracle. These moves have rattled IBM, HP and Dell, and will lead to a more active and competitive market.

4) Considerable implications for industry partnering and alliances

Partner and alliance managers, particularly those at IBM and HP, are going to be significantly impacted. Clearly their priority will be challenged by this acquisition. It is unlikely that IBM and HP will aggressively push any hardware-software bundle that impacts their own hardware business. In the long term, Oracle will have to look beyond traditional go-to-market models and more innovative alliances if it is looking at offering a bundle of Oracle-Sun offerings.

5) Oracle is no longer a cloud computing 'also-ran'

Oracle can quickly go from being an “also-ran” in the cloud computing space to a leader by leveraging Sun’s recently announced Sun Open Cloud Platform, which is based on Java, MySQL, OpenSolaris and Open Storage (all of which are technologies and/or solutions that Oracle will likely leverage significantly moving forward).

6) Consulting and integration will need work

Both Oracle and Sun have historically relied upon partners for a considerable proportion of services delivery, particularly from the point of view of consulting and integration. However, if the acquisition has genuinely provided Oracle with an end-to-end solution with and far less 'hardware agnosticism', it must develop strong services capabilities across the maintenance, management and consulting areas.

The question then is who will provide these services.

7) Acquisition brings a treasure chest of complementary software technologies

Following closely on the heels of last year’s BEA acquisition, Oracle now clearly has some massive integration hurdles to overcome as it seeks to rationalize its enterprise software infrastructure portfolio. However, the overlap in software products and technology between Oracle and Sun presents a very different set of challenges relative to the BEA portfolio. The best example of complementary technology from Sun is Java, which is the foundation for Oracle’s entire Fusion Middleware stack (and therefore also the foundation for the Oracle E-Business Suite of enterprise applications).

8) Maintenance revenue is an important component

Over the past 4-5 years, Oracle has done a remarkable job acquiring companies that provide solid growth potential (including up-sell and cross-sell opportunities) while also delivering very strong maintenance revenue streams. The proposed Sun acquisition fits perfectly into this pattern, with Oracle buying a base of blue chip clients tied to the Sun platform and road map. This maintenance revenue stream is a hedge against acquisition risk and an annuity to deliver financial benefits.

9) The financial payback for oracle will be favorable

Oracle’s acquisition strategy has been criticized—often vehemently by competitors—but even the harshest critics have a hard time finding fault with the financial returns of the firm’s acquisitions over the past five years. Oracle bought Sun for well below one-half its revenues (adding in Sun’s net cash and debt), while estimating that Sun will “contribute over $1.5 billion to Oracle’s non-GAAP operating profit in the first year, increasing to over $2 billion in the second year.” In our estimation, this is a positive financial deal for Oracle that will pay for itself, in part due to the lack of technology and product offering overlap that could have derailed deals with IBM, HP and Cisco.

10) Expect more acquisitions in the industry

We expect this move to spark accelerated M&As in the industry, which will lead to several firms getting caught in the middle or left out. Oracle’s move shows that there might be many more such possibilities in the technology industry. While Sun was facing challenging times well before the economic downturn, there are likely other big technology companies who will be looking for new alliances and partnerships via mergers or acquisitions. Some of these mergers or acquisitions could be completely out of the box or radical enough to confound everyone in the industry, very much like Oracle’s move did.

In the final analysis, Springboard concluded that the positives outweigh the negatives with this acquisition and that IBM, HP, Microsoft, SAP and Cisco will now have a more formidable enterprise computing competitor before them. In spite of the risks, Springboard believes this acquisition is indeed a bold stroke that will disrupt the market and force competitors to adapt quickly, for those that fail to do so could be headed for trouble.