Oracle's Sun Deal: Oracle May Need to Loosen Its Grip

When Oracle announced its $7.4 billion acquisition of Sun Microsystems in April, the software behemoth was acting on a grand vision. The deal was part of Oracle's aim to become a soup-to-nuts supplier of everything companies need to run their computer systems, from chips and operating systems to databases and business programs. The grand plan may need some revision. In order to alleviate pressure from European Union regulators worried about Oracle's (ORCL) growing power, Oracle may be forced to give up some control of a key aspect of the deal: the open-source MySQL database software owned by Sun. The EU on Nov. 9 formally objected to Oracle's acquisition of Sun. A Sun regulatory filing said the EU believes Oracle's ownership of MySQL would have "potential negative effects on competition" in the $19 billion-a-year database market. SUN (JAVA) makes computer systems and software including the Java programming language and MySQL database, a kind of electronic filing system. "Taking a Tough Stance"MySQL, available free of charge, runs the Web sites of some of the Internet's biggest brands. Among them: Twitter, Facebook, Google (GOOG), and Yahoo (YHOO). "They're taking a tough stance because 10 years down the road this could be a pretty big competitor to Oracle," says a securities analyst who asked not to be named because he was expressing personal views on the deal. After saying in September that it's looking into aspects of the deal, Europe's more formal objection to Oracle's acquisition of Sun sets the stage for negotiations on how to make the deal pass muster. Regulators may ask Oracle to release a new version of MySQL that it doesn't control to preserve competition. Sun bought MySQL for $1 billion in 2008. Oracle declined to comment for this article, but issued a statement Nov. 9 that said the EU’s objection "reveals of profound misunderstanding of both database competition and open-source dynamics…Because MySQL is open source, it cannot be controlled by anyone," Oracle said. MySQL is distributed under an open-source licensing agreement, which lets users freely modify its code, companies including Google, (AMZN), and a software development project called Drizzle that's staffed partly with Sun employees, have already modified the database or incorporated it into commercial products without buying an officially supported version from Sun. For example, on Oct. 27 announced that customers can rent the MySQL database from Amazon over the Internet, paying by how much data they store and transfer. Google maintains its own version of MySQL, too. The EU Is Positioning ItselfThe presence of these versions in the wild suggests that forcing Oracle to spin out yet another version of the software may be redundant. "The remedy's already there," says one industry executive familiar with the EU's thinking, who says a regulated new version of the software would have little impact on the way companies license and use MySQL, which is prized for its speed and adaptability to running large Web sites. "The vast majority of the installed base isn't controlled by the vendor…I'm at a loss why any other remedies would be needed," this person says. "There's something illogical in the whole thing." Whatever the proposed concessions, even Oracle's competitors believe the Sun deal will get done. "They're doing what the EU always does—making provocative statements," says an executive at an Oracle competitor. Analysts say the EU wants to position itself as an advocate for technologies that are more open rather than proprietary—closely guarded by license owners. Oracle has a commanding lead in the market for database software, which stores the information that underlies business applications and Web sites. Oracle held 49% of the $18.8 billion worldwide database market in 2008, according to market researcher Gartner (IT), compared with 22% for IBM (IBM) and 16.6% for Microsoft (MSFT). MySQL accounted for 0.5% of database sales, Gartner says. MySQL also accounts for a small portion of Sun's revenues. For its 2009 fiscal year ended June 30, MySQL and Sun's middleware generated $313 million in sales, of a total $11.44 billion. A Vehicle to Sell to Web CompaniesImmediate revenue isn't the primary importance of MySQL to Oracle. The database gives Oracle a vehicle to sell to Web companies that don't use its powerful and more expensive 11g database. Sun estimates there are more than 12 million copies of MySQL in use. "There's not a huge amount of financial value tied up in MySQL for a company of Oracle's size," says Bill Whyman, head of technology research at investment company ISI Group. "The advantage is more strategic." European regulators are concerned because if Oracle buys Sun, the largest supplier of database software would be acquiring the leading open-source database. The European Union first raised concern about the Sun deal Sept. 3, saying it wanted to make sure Oracle was committed to developing MySQL. European Competition Commissioner Neelie Kroes met with Oracle President Safra Catz in October. Java Is Key to FusionIndustry executives say the EU has also been asking for commentary on the effect of Oracle's potential ownership of the Java programming language, though the EU hasn't specifically cited the technology in public statements. Java is a key part of a new line of Oracle business applications called Fusion, the first of which are expected next year. For example, Oracle rival SAP (SAP) has been asking Sun and Oracle for direction on the future of Java, which it uses to build its products. Neither company has responsed, says SAP spokesman Herbert Heitmann. "There's growing concern in the [technical] community about Java," he says. "You don't get responses these days from Sun." European opposition to the deal is the main stumbling block for Oracle, which has spent $30 billion to acquire nearly 60 companies in the past five years. The U.S. Justice Dept. has already approved the deal. The European Commission has until Jan. 19 to make a final decision whether to allow the deal or block it. IBM, HP Swiping CustomersThe delay, however, is sapping Sun's value. Sales for Sun's fiscal first quarter ended Sept. 27 fell 25% to $2.24 billion, according to a report released Nov. 6. Sun shares the same day closed down 13¢, or 1.6%, at 8.10, vs. the $9.50 per share Oracle offered for the company in April. Sun is losing $100 million a month amid the delay, Oracle Chief Executive Larry Ellison said in September. IBM and Hewlett-Packard (HPQ) are also swiping its customers. On Oct. 20, Sun said it plans to lay off 3,000 workers in the next year, about 10% of its workforce, citing the delay in closing the acquisition, which was supposed to happen in the summer. "The longer this takes, the more money Sun is going to lose," Ellison said at the time, insisting he wouldn't spin off MySQL. This isn't the first time the EU has tried to block a merger of U.S. companies. In 2001, it scuttled General Electric's (GE) proposed $42 billion acquisition of Honeywell (HON), ruling that the companies' combination would hinder competition in the aircraft industry. Ellison has prevailed over trustbusters before, and is tenacious when he wants to close a deal. In 2005, Oracle bought business software maker PeopleSoft after a protracted fight with the Justice Dept. In 2008, it snared BEA Systems after BEA shareholders pushed for a higher price. "Oracle's a pretty tough competitor and they beat the DOJ in PeopleSoft," says ISI Group's Whyman. "The difference is Sun's losing a lot of money. Time usually plays to the regulators' advantage."

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