Oracle takeover shakes up the software industryby
Oracle CEO Larry Ellison has shaken up the software industry with a new takeover worth $7.4bn. Stuart Lauchlan finds out more about the deal and whether the full force of its impact is yet to come.
By Stuart Lauchlan, news and analysis editor
Larry Ellison just turned the software industry on its head! Indeed, he turned the entire IT industry on its head, altering the competitive landscape in a pretty decisive manner by swooping in to take over long-time Oracle partner, Sun Microsystems.
It's costing him a cool $7.4 billion to do it, but he's scoring some valuable gains in the process. He gets the Sun installed base, an operating system in Solaris, a suite of Office alternatives in OpenOffice, a hardware business and – best of all – he gets the Java development language. All that and he manages to thwart arch-rival IBM in its bid to acquire Sun! All in all, it looks like money well spent.
Jonathan Schwartz, CEO, Sun Microsystems.
Ellison made clear the two key assets that drove the deal: Java and the Solaris operating system. Solaris is "the heart of the business", he says. "The Solaris operating system is by far the best Unix technology available in the market. That explains why more Oracle databases run on the Sun Sparc-Solaris platform than any other computer system." He adds that Oracle will now be able to tightly integrate Oracle databases and the Solaris operating system, and offer customers a "complete integrated computer system, from database to disk".
Ellison also believes combining Sun's assets with Oracle's database and business applications will help businesses cut computing costs while increasing efficiency. "Our customers benefit as their system integration costs go down while system performance, reliability and security go up," he adds.
"There is no question in my mind that this transaction redefines the industry; redefining the boundaries that have frustrated the industry's ability to solve the problems that customers seek to solve, eliminating the cost and complexity of an industry that focuses on components instead of systems," says Sun CEO Jonathan Schwartz. "The combined Oracle and Sun will be just that: a systems and software powerhouse."
Between the lines
Of equal interest is what Ellison didn't say. Most notably there was no reference made to MySQL, the open source rival to the Oracle database which has 11 million installations worldwide. In 2007, Oracle offered as much as $850 million for MySQL, the third of its offers for the open-source database company. Conspiracy theorists jumped on the fact that Oracle President Charles Philips failed to mention MySQL in a letter to customers of both Oracle and Sun issued on Monday.
Oracle President Safra Catz said yesterday that the purchase would yield more profit in its first year than those of PeopleSoft, Siebel and BEA Systems combined. But Oracle is likely to cut at least 5,000 jobs, most probably from Sun's hardware arm. There are no details as yet, but Catz noted: "We have a track record of integrating acquisitions very rapidly and this time will be no different. By utilising Oracle's scale, we can deliver substantial operating efficiencies far in excess of what Sun has done to date."
It's going to be a challenge, but one that Oracle is most likely capable of completing, according to analysts. "Oracle has a consistent track record of delivering its expected M&A bounty," notes David Mitchell of research firm Ovum. "The Oracle integration team has certainly had a lot of experience in managing the integration of newly acquired companies into the Oracle fold, having managed well over 40 of these in the past four years.
"Once the acquisition has closed, customers and the market in general should expect to see the main element of the integration completed within the first 90 days. This will see answers to the main questions around product portfolio, sales and marketing organization, customer support, etc. becoming clearer. Oracle has a track record of doing just that, and we should not expect anything different with this acquisition."
While the deal does create a new powerhouse in the industry, it's unlikely to spark any serious anti-trust issues with the regulatory authorities. According to International Data Corporation, Oracle has 37.6% of the $22.2 billion global market, whereas latest figures for MySQL were just $38 million. "Oracle is a powerhouse in database management systems but it's hardly a monopolist," notes analyst Curt Monash of Monash Research. "I may well be overlooking something, but I haven't found a compelling anti-trust trigger."
And the future?
The wider ramifications of the deal have yet to be felt. For example, how will the takeover impact on Oracle's relationship with the likes of allies such as Hewlett Packard (HP) and Dell Computer as well as enemies such as SAP and Microsoft? For his part, Microsoft CEO Steve Ballmer was taken aback by the move. "I just learnt it ... I need to think about it. I am very surprised," he told reporters during a visit to Moscow.
IBM, which had been rumoured to be coming back to the negotiating table after its initial takeover talks collapsed, took an icy stance on being usurped by Oracle. "Oracle and Sun have been partnering for two decades," says IBM chief financial officer Mark Loughbridge. "We've picked up 14 points of market share to 32 points since 2000. As I look at this - what's really changed? Nothing. We’ve been competing with Sun. We know Oracle inside and out."
But Loughbridge is clearly being disingenuous. The reality is that nothing will be quite the same again. "We are now entering a market context where the 'big four' will equate to IBM, HP, Microsoft and Oracle. These suppliers will, between them, define a significant proportion of the IT market landscape for the next 10 years or more," says Mitchell.
David Mitchell, Ovum
"Other vendors in the IT market need carefully to consider the traditional advice of 'get big or get niche'. There is limited potential remaining in the market for another player to acquire the scale that would take them into the 'big four' league. The majority of suppliers should ensure that they have highly competitive but specialist offerings, rather than playing to scale card."
As for customers, it's now a case more then ever before for 'buyer beware' to be the order of the day. "Enterprise technology buyers need to be conscious of this new landscape," warns Mitchell. "Historically, it may have been prudent for CIOs to spread their spending across multiple suppliers, using competition between suppliers to keep prices keen – albeit recognising that supplier consolidation brought benefits such as a reduction in supplier management costs.
"However, the portfolios of IBM, HP, Oracle and Microsoft in particular are now so wide that negotiating enterprise licensing agreements may produce a better commercial outcome for the CIO buyer. As a minimum, buyers must revisit their procurement strategies and policies to ensure that they reflect the current and future supplier landscape – one which will only see further consolidation."