Oracle, Entering Hardware Arena, Agrees to Buy Sun for $7.4B

IDG News Service — Oracle has signed a deal to purchase Sun Microsystems for US$7.4 billion, plunging the enterprise software vendor into the hardware market and making Sun the latest company to be subsumed by the Silicon Valley giant.

Oracle will pay $9.50 per share in cash for Sun, or $5.6 billion net of Sun's cash and debt, according to Oracle. The move follows Oracle's purchases of a raft of companies in the last few years, including Siebel, PeopleSoft and BEA Systems.

The deal comes after Sun reportedly walked away from an offer from IBM a few weeks ago. Though there were rumors Oracle might purchase Sun, it has never before had a hardware or server OS business, a market in which a significant amount of Sun's assets are tied, so the deal seemed unlikely. However, Sun's Solaris long has been a successful platform for Oracle's database business.

The two companies also have areas of common interest in their support for Java software, one of the only areas where the companies' product lines overlap. Sun has an open-source Java application server called Glassfish that Oracle likely will hold onto, although the fate of Sun's other commercial Java software, the Java Enterprise System (JES), is unknown.

Oracle also had overlap in this area when it purchased BEA, but BEA WebLogic had significant installed base, and Oracle kept the product alive. Sun's installed base for JES is smaller, so Oracle may choose not to hold onto it.

Oracle said the Sun deal should bring the company more revenue in the first year than the company planned for its acquisitions of BEA Systems, PeopleSoft and Siebel combined. Sun should contribute $1.5 billion to Oracle's non-GAAP operating profit in the first year, a number that will increase to more than $2 billion in the second year, the company said.

For Sun, the deal will bring an end to CEO Jonathan Schwartz's [cq] efforts to turn the struggling company around. Sun's sales have been declining since their peak during the dot-com boom, as customers turned away from its pricey Unix servers in favor of x86 systems. Sun's share price has also fallen sharply.

Efforts to attract new customers with open-source software, and Sun's belated decision to enter the x86 market, have not paid off fast enough to give it the boost it needs.

With Sun on board, Oracle now will have to figure out how to navigate the server OS and hardware business. In addition to supporting Solaris for many years, Oracle also supports its software on Linux. Though Sun's hardware does not have the reach that its former suitor IBM's does, the deal gives Oracle a combined hardware/software business model more akin to IBM's, with which it now competes in the database market.

(James Niccolai in San Francisco contributed to this report.)