Oracle (ORCL): Finally Bitten Off More than it Can Chew?

Oracle (ORCL) has been very active in the mergers and acquisitions market for some time now. However, most of Oracle’s recent acquisitions have been smaller, often private, tech companies that they can buy at very distressed prices, as we wrote about back in February (Oracle Looks Downright Visionary). In a surprise announcement, Oracle reported that they will in fact buy Sun Microsystems (JAVA) for around $7.4 billion. Sun was in advanced talks with IBM (IBM) that fell apart only days ago. The deal is valued at $9.50 per share which is a dime more than IBM had offered for Sun.

OracleThe new merger with Sun will give Oracle a presence in the hardware business, as Sun was the fourth largest player in the server market and the second largest in the high end server market. An Oracle spokesman said the company expects the acquisition to bring in at least an additional 15 cents per share for the first full year after integration. While 15 cents per share does not sound all that impressive, it would be more profitable after one year than Oracle’s previous major acquisitions of BEA, PeopleSoft and Siebel combined in their first year. The deal has the additional bonus of likely hitting less resistance from regulators because the companies do not have as many overlapping product lines as did IBM and Sun.

Interestingly, among the crowd of those cheering the merger is one major competitor’s CEO. Steve Ballmer of Microsoft (MSFT) had caught some headlines when referring to the proposed merger of Sun and IBM earlier in the month saying,

“You pick up a lot of stuff when you buy Sun. [A deal] gives [IBM] a year or two where all they’re doing is digesting it. I relish that year.”

When Ballmer was told of the new arrangement that pits Oracle with Sun instead of IBM, he said he will need to “think about it” but its doubtful he has changed his stance on the challenges that come with integration of a company like Sun. There is no doubt he will be selling that line in order to try and gain market share from the newly merged entity. However, it is worth remembering that Oracle is not new to taking companies under its wing with an average of one acquisition each month for the last 4 years. Most of these acquisitions were far smaller than Sun, but at least the company has experience with integration. Oracle has been nibbling at smaller tech companies and now they have bitten off a major project.

Time will tell whether Ballmer was correct or just getting a jump on the public relations battle. For now our take is that these two complimentary businesses, with long time friends in Oracle’s CEO Larry Ellison and Sun’s Chairman Scott McNealy, will have its challenges but in general its a great fit.

Oracle: Finally Bitten Off More than it Can Chew?

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