Why Oracle Must Fight Europe

Anyone who says Oracle (Nasdaq: ORCL  ) founder and CEO Larry Ellison should agree to sell MySQL to get Europe to back off its objection to his company's proposed $7.4 billion acquisition of Sun Microsystems (Nasdaq: JAVA  ) is either:

1. Ignorant.

2. Naive.

Sorry, folks, but we need to talk responsibly about this. We need to realize that no one -- that's right, no one -- is going to make a fair bid for MySQL so long as the European Commission is trying to pry it from Ellison's hands with a crowbar.

"[What happens] when the world's biggest proprietary database company proposes to take over the world's leading open-source database company?" Competition Commissioner Neelie Kroes said in an interview with The New York Times in September, back when the commission was raising questions rather than objections.

Oh, it's on, Larry
But object the European Commission does, according to this 8-K filing from Sun, which appeared Monday.

"The Statement of Objections ... is limited to, the combination of Sun's open source MySQL database product with Oracle's enterprise database products and its potential negative effects on competition in the market for database products," reads the document filed with the Securities and Exchange Commission.

Pffffffffftttttttt.

That's the sound of value escaping from this deal, like air from a balloon. Can you imagine how competitors see this ruling? They're cheering. The market leader, once poised to widen its lead, will either suffer an expensive fight or risk parting with a valued asset at a discount price.

The European Commission must know this. Regulators have no authority to force, say, Red Hat (NYSE: RHT  ) to bid more than the $1 billion Sun spent on MySQL in early 2008. Nor do they hold sway over the bank accounts of any of the alternative acquirers. IBM (NYSE: IBM  ) , Sybase (NYSE: SY  ) , Teradata (NYSE: TDC  ) , and, to a lesser degree, Microsoft (Nasdaq: MSFT  ) come to mind. None of them will bid what MySQL is worth.

Why should they? Why bid high when you can bid low and still win? This is a stacked deck, and the EC is dealing the cards. I can hardly blame Ellison and his team for calling shenanigans.

"The Commission's Statement of Objections reveals a profound misunderstanding of both database competition and open source dynamics," Oracle said in its (ahem) own statement of objections. "It is well understood by those knowledgeable about open source software that because MySQL is open source, it cannot be controlled by anyone. That is the whole point of open source."

Easy now, Larry. Easy. Deep breath. Relax. Let's talk about this.

Here, try this paper bag
First, we ought to concede that those who are concerned about Oracle acquiring MySQL aren't exactly of alarmist pedigree. Many of them are developers.

We know this because, in April, Ellison dispatched Ken Jacobs to reassure MySQL coders at their annual user conference. Jacobs is a key figure among MySQL loyalists because he leads product strategy for Oracle's server technologies. He'd be the one to either support or kill their baby. Jacobs, predictably, used his time on stage wisely by promising to be a good steward of MySQL.

The U.S. Justice Department takes Jacobs at his word, even if conspiracy theorists such as MySQL creator Michael Widenius don't. He and former MySQL investor Florian Mueller have thrown their weight behind the EC action. (Both men are European; Widenius is from Finland, Mueller from Germany.)

"Every day that passes without Oracle excluding MySQL from the deal is further evidence that Oracle just wants to get rid of its open source challenger and that the [European Union]'s investigation is needed to safeguard innovation and customer choice," Mueller said in a press release that appears at Widenius' blog. "This is highly critical because the entire knowledge-based economy is built on databases."

Mueller's right. The digital economy is built on databases, and more of them were created by Oracle than anyone else. What I don't understand is how Ellison's willingness to fight to acquire a valuable asset somehow constitutes a conspiracy. He's charged with protecting the interests of his fellow Oracle shareholders.

Could somebody please call Bob Barker?
You might say Ellison is fighting to earn a return on his invested dollars. Oracle has committed $7.4 billion to acquire Sun. MySQL has to constitute at least $1 billion of that, and not just because that's what Sun paid.

MySQL was generating $50 million in annual revenue at the time of the Sun deal. Analyst Heath Winter of Think 20/20 Research now says that number is closer to $300 million, ZDNet reports. A rush to cloud-computing services suggests he's right. (MySQL is often used to power Web services.)

And if he is, or even if he's close, Ellison can't simply drop this deal. Fast growers tend to command big multiples in acquisitions; Sun paid 20 times revenue for MySQL. Another acquirer would pay Oracle less, but would seven times revenue be out of the question when a cloud giant like Akamai trades for five times sales as of this writing?

And what about Facebook? Press reports peg its valuation at anywhere from $4 billion to $6 billion, and yet the business is on track to produce $500 million this year -- meaning the world's largest social network trades for eight times revenue.

Admittedly, I'm talking about anecdotal evidence here. But what little we have suggests that MySQL today is worth materially more than what Sun paid for it. Ellison has no choice but to fight for fair value, and that means fighting the European Commission's ruling.

Teradata is a Stock Advisor selection and Microsoft is an Inside Value pick. Akamai is a Rule Breakers recommendation. Motley Fool Options recommends a diagonal call on Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers owned shares of Akamai, IBM, and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is enjoying the view from the bottom of this article. Lovely, isn't it?


Read/Post Comments (8) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 11, 2009, at 2:23 PM, yzfinance wrote:

    Hi Tim,

    I'm not sure what this article is trying to prove. Is it that Oracle must keep going and try to acquire Sun with MySQL as part of the deal? Or that the European Commission should not block the deal?

    If it's point one, I have to say that's because of your vested interests in Oracle. As you wrote yourself, "What I don't understand is how Ellison's willingness to fight to acquire a valuable asset somehow constitutes a conspiracy. He's charged with protecting the interests of his fellow Oracle shareholders." That's absolutely accurate. If the biggest proprietary database vendor acquires the biggest open source database, it could potentially lead to competition problems. Is Ellison right in doing so? From his and his shareholders point of view, absolutely. It makes perfect business sense, since it would give Oracle that much more weight in the industry.

    Now what is the goal of the EC? It's not to protect the Oracle shareholders. It's to ensure the industry remains competitive. Notice that the EC didn't complain about the Java language, even though that's a very valuable asset and is something used by many of Oracle's competitors and customers alike. But MySQL is a different case; it's a database model/language/technology, which is exactly what Oracle does at its core. This is like Oracle buying SAP. Would you see a problem with that? I would. Yes, there are alternatives to Oracle and SAP in the ERP field, like there are alternatives to Oracle and MySQL in the database field. But it would simply give way too much power to one company.

    As much as I can understand Ellison's (and your) point of view, please keep in mind that the EC is maybe just trying to do its job here, and might have raised a valid point. The show will go on and both sides will fight, but at least the fight is worthwhile.

  • Report this Comment On November 11, 2009, at 4:37 PM, bobscomment wrote:

    The impression that news sources are giving is that MySql is not a significant database because it accounts for less than half of one percent of the total global database revenue. This ignores the free open source version which is the main choice for small businesses using ecommerce through webhosts. For instance, 61 webhosts are reviewed at www.rgreathosts.com and out of 61 webhosts; all offer MySql as their database software. A recent article by a webhost (http://www.ecommerce-retail.com/mm5/articles/lamp-report.htm... advises that by 2006, MySQL had 44% of the web server market with 10 million active installations and over 50,000 downloads per day. Most retail small businesses that use ecommerce, create their own web sites through a web host. The US Census Bureau shows that there were 1,979,576 retail companies in 2007, 1,809,374 of these were individual proprietorships. On another issue, news sources also reported that Oracle plans on using MySql to compete against Microsoft in the small to medium business market. The flaw in this is that MySql already exists and its licensed revenue producing version does not a significant market share now, so why would it suddenly start to compete against Microsoft. They would gain more by modifying it to transition users into Oracle. There is no use speculating on what Oracle plans to do with it. If it is split off to another large company that doesn’t have any potential database conflict of interest, than the many small businesses in the world that rely on MySql would no longer have to worry about whether or not it will continue to be supported. The EU is not charged with looking at whether MySql is monetarily competitive as the US anti-trust people are. They are looking at whether Oracle is exerting its dominance in the database market to eliminate or modify a free alternative database to their own purposes, inconveniencing the millions of businesses users. The EU has always tried to further open source and I think their concern is well founded.

  • Report this Comment On November 11, 2009, at 5:07 PM, TMFMileHigh wrote:

    Hello yzfinance and bobscomment,

    Thanks very much for your comments.

    My point is that, for as much good as the EC proposes to do with its objection, it cannot help but cause harm to Oracle and its shareholders.

    The issue is that the EC has no remedy where Oracle can also win, and that's troubling. It suggests that Ellison should be punished for making the bid in the first place.

    I know how that sounds. But when the EC insists on a sale, it creates a low-value environment and guarantees price pressure. Profitable sales are never forced.

    Now, having said all that, there is one scenario in which both the EC and Oracle *can* win: allow Oracle to acquire MySQL yet demand that it spin off at least 75% at a price executives deem fair.

    That way, Oracle shareholders would realize some value on their deployed capital while preserving the stated interests of MySQL and concerned developers via an independent public company.

    And yes, I admit it: I wouldn't mind having the option of buying shares of MySQL on the open market, given its growth and market position.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On November 12, 2009, at 1:11 AM, chakravaka wrote:

    I think European Commission is correct. Those who say that Oracle and MySQL are not competitors don't know what is happening in the industry. There are large number of users who have downloaded MySQL but more important is that many data centers use MySQL and it is going to become even more important in future because of upcoming technologies such as cloud or SaaS/PaaS providers. The data base is very important and critical factor in any data center or cloud architecture and MySQL is very important choice for many. If Oracle manages to stifle use of MySQL, it can open up a new market for Oracle database by forcing current users of MySQL to shift to Oracle.

    If MySQL was not a competitor, and if it is not expected to shake Oracle's powerbase, then why would Oracle fight so hard to keep it part of the deal and take 100 million a month loss at Sun for last five months ? As per Larry Ellison's own admission, Sun is loosing 100 million a month and more importantly key customers to HP and IBM. Any smart leader such as Larry is not going to take 500 million loss without any reason.

  • Report this Comment On November 12, 2009, at 7:16 AM, TMFMileHigh wrote:

    Hello chakravaka,

    Thanks for writing.

    >>Any smart leader such as Larry is not going to take 500 million loss without any reason.

    Well, let's be fair. The fight didn't start five months ago, it started this week. You could argue that Oracle was warned in Sept., when the EC first issued some concerns, but capitulating before an actual objection could have proven presumptive -- the EC might not have liked Ellison's proposed solution.

    Write that comment here again in four months, if we don't have a solution before then.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On November 12, 2009, at 2:38 PM, justin7777 wrote:

    Oracle bought Sun. If the EC wanted to buy Sun or anyone else they could have. They didn't ! The US

    has already approved this deal so I really think the EC

    should have nothing to say about it unless they own Sun

    or want to buy it. The previous owners should also have nothing to say about it. They don't own it anymore.

    I would not buy Sun unless I am getting all of my deal.

    Oracle could walk away because MySQL was part of the

    deal ! You break your deal then you lose and Sun will be out due to who the EC. If you don't want to use MySQL

    then use another product. Its that simple. Last I looked

    the both company are based in California not in the EC.

  • Report this Comment On November 12, 2009, at 7:38 PM, chakravaka wrote:

    Thanks Tim for your reply.

    I agree that EC objection was surprise to many but my point is that once Oracle knew there is a fight at hand they could diffuse it without loosing serious money in the deal. The simple fact that they chose to fight suggests that there is something more than money involved here.

    Here is problem I see from user's perspective.

    Some products such as MySQL, become popular because they are open source and good alternative to proprietary products.The users have embraced the product because it is open source and it has received contribution from large international community. Such products should not fall under the wraps of a dominant industry player such as Oracle. Looking at latest examples like fate of Virtual Iron products people are bound to have reservations. If Oracle has plans to keep MySQL free and alive, they can easily do a spin-off after the Sun acquisition is complete. They can do so with a no compete clause that protects Oracle for first couple of years. Any company like MySQL with 300 million+ revenue and large user base that is still growing will be worth more than 1 Billion. So oracle won't loose money.

  • Report this Comment On November 13, 2009, at 1:45 PM, justin7777 wrote:

    I don't see Oracle fighting the EC has until January

    to approve the sale. The user just may have to use

    a Oracle MySQL product. What a shame.

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