Oracle Buys Sun: Who Are the Winners And Losers

Get past the happy merger talk, and what we have here is a company that's famous for ruthlessly maximizing profits, buying one that is famous for ruthlessly minimizing them by refusing to make the huge cuts Wall Street has begged for over the years.

With no further ado, here’s my take on Oracle’s $7.4 billion acquisition of Sun on April 20:

WINNERS:

Oracle — I’m not a fan of this merger, as described by the companies. I don’t think Oracle, with its high margins, is going to end up wanting to be a major hardware player and duke it out with the IBM’s and Dell’s of the world. For all the talk of this deal being a gamechanger, the idea that Oracle will win with its own proprietary stack of technology—hardware, silicon, operating system, middleware, applications, service—is far easier said than done. And this strategy ensures a fierce competitive response from scores of more specialized players (one that will likely surpass the hoopla over Cisco’s recent entrance into the server market). Still, I think Oracle’s shareholders will still be well-served in the end. For starters, with one relatively cheap deal, Ellison has now vaulted Oracle onto the leader board in the battle royale to own the cloud. Two days ago, it was a software company. Now, it’s a contender versus IBM, H-P, Cisco, Microsoft, Intel and others. And regardless of the grand strategic talk in the press releases, Oracle is ruthless about cutting costs. There are no doubt gems within Sun. If any company will have the discipline to mine only them, and toss the rest, it’s Oracle. Investors seem to agree.

Microsoft — It seems to me that Sun’s loyal installed base would have moved to Windows long ago if it was going to. Same with Oracle in the database business, to some extent, vis a vis Microsoft’s SQL. But this deal could make it harder for Oracle to win more business from Microsoft, either from existing or new customers. That’s because IBM, Dell and other computer makers—Oracle’s key partners in the past—will look for reasons to push other alternatives on their customers.

Jonathan Schwartz — He’s had a turbulent run as CEO of Sun, and his radical strategy for Sun never really worked. But he ended up brokering a deal that serves his shareholders well. And while I doubt he’ll remain at Oracle, I wouldn’t be surprised if he’d see that as more of a reward than a punishment. Clearly a big thinker and effective communicator, it will be interesting to see what he can do with a company that’s not anchored down by as many strategic problems as Sun has been for the past decade.

LOSERS:

Sun Employees — Get past the happy merger talk, and what we have here is a company that’s famous for ruthlessly maximizing profits, buying one that is famous for ruthlessly minimizing them by refusing to make the huge cuts Wall Street has begged for over the years. Already, rumors of massive cuts are percolating around Silicon Valley—up to 70%, according to Citigroup analyst Brent Thill. The press release says it all: even before any of the obligatory mention of long-term synergies and growth possibilities, Oracle assures shareholders the deal will be “accretive”.

Open Source — I’m sure Oracle will make a show of pushing MySQL, and will continue to offer it to accounts that insist on using it. But I’d expect it to push its traditional software license model on customers, especially on start-ups once they “grow up” and need more “enterprise-ready” solutions. That’ll be the pitch, anyway. But I think Jonathan Schwartz’ belief in the power of giving away software will quickly give way to Ellison’s belief in charging for it. Who knows, maybe Ellison will try to monetize Java by cranking up licensing fees. After all, most companies can’t do without it, and what’s the worst that can happen? Oracle rival IBM needs Java at least as much as Oracle does.

Computer Makers — To the extent that Oracle can pull together a soup-to-nuts offering for the data center, rivals such as IBM and HP have two bad choices. They can either lose the hardware business to Oracle’s new Sun-based offerings. Or they can resell Oracle’s software on their own boxes, undoubtedly on terms more attractive to Oracle as these distribution deals aree rewritten in the years ahead.

Scott McNealy — On the press conference today, McNealy read his statement about the merger with about as much enthusiasm as Sarah Palin being introduced to Tina Fay. He sounded monotone, and read at a clip that made me think he was late for a tee time. Maybe I’m wrong, but I wouldn’t have blamed him. While he and Ellison have done billions of dollars worth of business over the years, odds are that McNealy will have no ongoing role at the merged company. There’s not room for two such visionaries (or egos) at one company, especially when their operating philosophies are so different. I hope I’m wrong, since McNealy has proven more right about the evolution of the IT world than almost any other CEO I can think of, with the possible exception of Steve Jobs and John Chambers. Remember the Big Friggin Webtone Switch? That’s a spicier description of what others call clouds or unified computing architectures. And McNealy was talking about this over a decade ago.

Innovation — It was probably inevitable, but America lost one of the most innovative, swaggering, damn-the-torpedos companies in Silicon Valley history yesterday. Shareholders should rightly cheer, but the odds of Sun pulling off another revolution as part of Oracle, as it did with the workstation, the UNIX server and Java just got a lot more remote.