Today's announcement that Oracle (NASDAQ: ORCL) would acquire Sun Microsystems (NASDAQ: JAVA) for $7.4 billion worth of cash left me scratching my head. The rationale? Something that Oracle's president calls non-GAAP earnings. Does this mean that Oracle's first acquisition of a hardware company makes strategic sense? I don't know.
I am not sure what non-GAAP earnings are, but it sounds like it is a special kind of accounting meant to justify a deal that would not look good on a GAAP basis. Safra Catz, Oracle's president, estimates that on a non-GAAP basis, the deal will add $1.5 billion in "non-GAAP operating profit" in the first year and $2 billion to that new measure in future years.
One thing seems clear. This $9.50 a share deal values Sun at 36% above its Friday closing price. And the deal is unlikely to encounter the kind of anti-trust scrutiny that a deal with International Business Machines (NYSE: IBM) -- at the same price -- would surely have met due to their overlapping server businesses, which would have yielded a 65% share of the high-end Unix server market and a dominant share of the tape storage market.
So this deal is a clear win for Sun. But will these non-GAAP earnings really help Oracle earn back the premium it paid for Sun? After all, Oracle currently sells its software on servers from Sun's rivals -- how will Oracle decide whether to maintain those partnerships for the benefit of its software or sell Oracle software only on Sun servers for the benefit of its new hardware business?
Update. A colleague emailed to suggest a clear rationale for this merger -- it helps Oracle take out a competitor. In 2008 Sun spent $1 billion to acquire MySQL, a database used by many social networks like Facebook, which competes with Oracle's database software. A few years ago, Oracle bought InnoDB (a database engine product from Innobase, a Helsinki, Finland-based company) which many companies use in conjunction with MySQL. Perhaps, this deal requires more antitrust scrutiny than I initially thought.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
4-20-2009 @ 12:40PM
Sramana Mitra said...
I see Oracle defining its entry in 2 key software trends through the Sun acquisition: OpenSource and Cloud Computing / SaaS: http://www.sramanamitra.com/2009/04/20/oracle-acquires-sun-opensource-first-saas-next/
Java, yes; hardware, may be; but what this really positions Oracle for is vastly enhancing its Cloud Computing story, including apps. I expect a set of SaaS acquisitions soon.
4-21-2009 @ 2:11PM
James said...
This is a data-base software company buying a data-base hardware company to squeeze as much of the remaining profit out of the business application market as possible.
Anyone who says they bought Sun for cloud computing is NUTS. Sun has no cloud IP to speak of and is playing catch up there to the real leaders like Google and Amazon. Oracle didn't pay 7.4B for a cloud offering Sun launched, oh about a week ago? Right...
http://stepbackforward.wordpress.com/2009/04/18/oracle-micro-systems/