The Sun Isn't Shining for Oracle

Oracle (Nasdaq: ORCL  ) has a long track record of making tough software acquisitions work. But in taking on stumbling, money-losing hardware ex-giant Sun Microsystems, it's starting to look as if the company bit off more than it can chew.

Plummeting market share
It might be true that Oracle acquired Sun more for its software than its hardware; the company's Java programming language and MySQL database platform were especially prized assets. But all the same, Oracle needs to make Sun's once-dominant UNIX server business a success to justify the $7.4 billion price tag attached to the acquisition. Critics of the deal noted from the start that this wouldn't be easy, given the steady market-share declines that proprietary UNIX systems had been seeing over the past decade at the hands of cheaper systems running Linux and Microsoft's (Nasdaq: MSFT  ) Windows, and powered by Intel (Nasdaq: INTC  ) Xeon and AMD (NYSE: AMD  ) Opteron processors.

These fears only got stronger in the months immediately following the deal's announcement, as customer uneasiness over the deal's impact on Sun sent its market share into freefall. UNIX archrival IBM (NYSE: IBM  ) enjoyed particular success in poaching Sun clients.

Meanwhile, Gartner first-quarter server market share data, released earlier this week, threw some cold water on the hope that Oracle's closing of the Sun acquisition in January would help stabilize the situation. Gartner estimated that Sun's Q1 server revenues fell by 38.7% annually, leading its market share to plummet from 9.6% to 5.6%. Even worse, sales of "x86" systems, largely based on Intel and AMD's Xeon and Opteron processors, were estimated to grow by 32.1% over the same time. Strong demand for x86 hardware benefits Hewlett-Packard (NYSE: HPQ  ) and Dell (Nasdaq: DELL  ) -- two companies that can't be thrilled that a longtime partner such as Oracle is now a competitor.

Does Oracle have a clue?
Beyond Sun's ongoing market-share collapse, Oracle's recent actions and comments suggest that the software colossus is in over its head trying to turn around a large hardware business. Already, the company has angered Sun customers and resellers by drastically increasing the price of customer-support services for Sun's servers, and altering the general structure of support contracts.

It looks as if Oracle thought it could get away with this maneuver because it had succeeded in doing the same with software acquisitions. But instead, it's learning the hard way that -- surprise, surprise -- the hardware business is a very different animal, and running it like a software business can trigger a strong customer backlash.

Likewise, recent comments from Oracle CEO Larry Ellison in a Reuters interview suggest an obsession with improving Sun's bottom line over the short term, at the risk of further damaging the long-term viability of its server business. Ellison bemoaned how Sun lost money on some of its deals and also took a loss in reselling products from Hitachi and Symantec. Ellison's used to the sky-high gross margins enterprise-software companies see on almost every deal, and his opinion suggests a lack of understanding that hardware companies sometimes need to take a loss on deals to maintain an account that's still quite profitable overall. Insist on never taking a loss on a transaction, and you might have trouble doing any business at all.

Oracle is intent on quickly turning Sun's hardware operations into a profitable business, and it just might succeed in that goal. But between Sun's weak competitive position and Oracle's shortsightedness, I wouldn't count on seeing the division make much money for Larry Ellison over the long haul.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Intel and Microsoft are Motley Fool Inside Value selections. The Fool has created a covered strangle position on Intel. The Fool owns shares of and has written puts on Oracle. Motley Fool Options has recommended a buy calls position on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 28, 2010, at 9:41 PM, papershredder88 wrote:

    This article ignores the fact that Sun/Oracle manufacture x86 systems. The article leads you to believe that Sun/Oracle do not produce x86 systems, which is incorrect.

    It also says: "These fears only got stronger in the months immediately following the deal's announcement, as customer uneasiness over the deal's impact on Sun sent its market share into freefall."

    I believe that this is incorrect. I think Sun customers were freaked out by the fact that the FTC and EU delayed the completion of the acquisition by almost a year, during which, Sun had to continue to lay people off. Therefore, customers delayed purchases and HP and IBM (who also negotiated to buy Sun) took full advantage to poach customers. It didn't have to do with the deals impact as much as the uncertainty over the deal being completed.

    Oracle's challenge is in monetizing Sun's products to make them profitable. Maybe the hardware support was too cheap, I don't know. You'd have to compare it to IBM and HP.

    Please get your facts right next time.

  • Report this Comment On May 29, 2010, at 1:13 PM, papershredder88 wrote:

    Eric,

    The old SPARC stuff was seeing market share stagnant or declining since the dotcom crash in 2000 when people started leaving Sun/Solaris for Linux. The SPARC CMT seemed very well received in recent years, but the x86 systems were also on the upswing. See this breakdown:

    http://www.slideshare.net/earningsreport/sun-microsystems-q2...

    I think that Sun's Q209 ended in Dec 2008. This is well before reports in Mar 2009 that IBM was in talks with Sun.

    For reference and timeline 2 good links here:

    http://sec.gov/Archives/edgar/data/709519/000119312509107681...

    http://www.reuters.com/article/idUSBNG47936420090318

    Regarding customer confidence in Sun and why... As a customer you see the report that IBM was in talks with Sun in late Mar 2009, and then the signing of the deal with Oracle on Apr 19, 2009, news reports of Sun shedding employees, and it's stock price.

    When making a multi-million dollar capital equipment purchase you have to do some due diligence on the company you're buying from. One key factor is "is the company going to be around for the next X years?" Given the above concerns, if the merger doesn't get approved quickly by the DoJ (sorry I misspoke when I said FTC) and EU, and the buyer decides it's too much trouble and drops out, then how much longer is Sun going to be around developing systems and supporting them? With that kind of uncertainty I wouldn't be buying from them.

    If the deal goes through, with a large company like IBM or Oracle buying them I would be confident that there would be an upgrade path and maintenance available. With Oracle buying them I would probably be more confident as I'm likely to already be a customer of Oracle.

    So now Oracle has signed the deal in Apr 09 and the DoJ is reviewing it. They come back and ask for more info delaying the approval. On Aug 20 they approve it and the EU starts their review. In Nov the EU objects and it finally is approved Jan 20ish, 2010. Over 9 months of uncertainty, continued layoffs, and poaching.

    I recall a lot of articles like the one below talking about the delays causing Sun to hemorrhage money and customers:

    http://www.internetnews.com/hardware/article.php/3837556/EU-...

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