News : Oracle to buy Sun Micro, enters hardware market

By Jim Finkle

BOSTON (Reuters) - Oracle Corp plans to enter the computer hardware market by buying Sun Microsystems Inc for more than $7 billion, swooping in after Sun's talks with IBM fell apart.

The announcement on Monday surprised many Oracle watchers, who believe the company can boost profitability at Sun's software businesses but were unsure if it can be as successful with Sun's hardware unit amid stiff competition from IBM, Hewlett-Packard Co, Dell Inc and new entrant Cisco Systems Inc.

"It's an out-of-the-box, left-field type of a deal because Oracle is buying a predominantly hardware business," said Jefferies & Co analyst Ross MacMillan. "The push-pull of the deal is the uncertainty of the hardware business with the earnings accretion of the software business."

The deal would make Oracle the world's fourth-largest maker of servers, with the No. 2 slot in the high-end of the market, which was worth about $17 billion last year. It is already the world's No 2 maker of business software after IBM.

Oracle will pay $9.50 a share for Sun, which values the high-end server and software maker at about $7.06 billion, based on 743 million shares outstanding as of the end of its fiscal second quarter on December 28, according to Sun.

Sun had previously rejected IBM's offer to pay up to $9.40 a share, according to sources with knowledge of the matter.

Shares of Santa Clara, California-based Sun jumped 36.3 percent to $9.12 in Nasdaq trading, while Redwood City, California-based Oracle shares fell 1.7 percent to $18.74. Shares of IBM, which declined to comment, fell 0.32 percent.

Oracle President Safra Catz said on a conference call that Oracle intends to make the hardware division profitable. Sun's top-selling products are high-end servers and storage gear.

Catz said the acquisition, which the companies expect to close this summer, will add at least 15 cents per share to earnings in the first full year after closing.

It will be more profitable on a per share basis in the first year than Oracle had planned for its previous purchases of BEA, PeopleSoft and Siebel combined, Catz said.

OLD FRIENDS

The companies said the transaction is valued at $5.6 billion net of cash and debt. Sun's board -- which includes a seat held by its top shareholder Southeastern Asset Management with 22 percent stake -- had unanimously approved the deal, which is subject to shareholder and regulatory approval.

Oracle Chief Executive Larry Ellison and Sun Chairman Scott McNealy are two Silicon Valley pioneers who have become close friends over the years as their businesses worked together to take on rivals including Microsoft Corp and IBM.

Oracle and Sun have been partners for more than 20 years; Oracle's database and related software already work closely with Sun's Java software and Solaris operating system.

"The deal would strengthen Oracle's position against IBM. Oracle has done a good job on acquisitions it has done earlier," said Robert Jakobsen, analyst at Jyske Bank in Copenhagen. "It makes sense also historically. Oracle has been more successful commercializing software than Sun."

Sun would add more than $1.5 billion to Oracle's operating profit in the first year, rising to more than $2 billion in the second year, Oracle said. Analysts expect Oracle revenue of $22.7 billion this year, according to Reuters Estimates.

Sun rose to prominence in the 1990s but never fully recovered from the dotcom bubble burst in the early 2000s, when demand for its high-end servers cratered.

The company has been looking for a buyer for months, a person with knowledge of the matter said, with IBM, Oracle, HP, Dell and Cisco having all been cited as possible buyers.

Last month, IBM emerged as the lead contender to buy Sun but those talks collapsed primarily because the two sides were unable to agree on guarantees that IBM would not walk away from the deal under antitrust regulatory scrutiny, the source said.

Sun was more comfortable striking a deal with Oracle because the two operate complementary rather than overlapping businesses, and antitrust roadblocks are less likely, the source said on condition of anonymity.

Oracle expressed its interest in buying Sun's assets several weeks before the two sides started formal negotiations late last Thursday, the source added.

Analysts have said the sale of Sun could signal a new wave of mergers and partnerships in the data center market as companies strive to provide more comprehensive services that tie hardware and software offerings together.

"It moves Oracle more into the competition with HP and IBM and Microsoft. It makes them a player in the space," said Shannon Cross of Cross Research. "It gets hardware, which should be interesting to see since Oracle doesn't make things. It's going to give them access to customers who weren't using the Oracle database."

(Additional reporting by Anupreeta Das, Franklin Paul and Ritsuko Ando in New York, Tarmo Virki in Helsinki; Writing by Tiffany Wu; Editing by Derek Caney)