With IBM out, Oracle jumps in to buy Sun for $7.4 billion


Oracle Corp., whose lucrative corporate software business has lined its coffers with billions of dollars, on Monday snatched up Sun Microsystems Inc. for $7.4 billion in cash, pushing the total value of all acquisitions that day to $16 billion and raising hopes that U.S. companies are cranking up their acquisition engines once again.

“It has been a while since mergers and acquisitions have seen this type of activity on one day,” said Kurt Kunert, publisher of FactSet Research Systems, a financial services information company. “It’s about time for a turnaround.”

Mergers and acquisitions hit their lowest point in years during the first quarter of 2009 with the number of deals down by a third from the same period of 2008 and the value of transactions off 29%. But Monday’s announcements, led by Oracle, showed that cash-rich companies view low stock valuations as an opportunity to bargain hunt.


Companies are sensing that the nation’s economic slide may be bottoming out, so they’re jumping into deals that plug holes in their operations or expand their businesses, said Wes Walraven, the Western region mergers chief for Citigroup Inc.

That was the case with Redwood City, Calif.-based Oracle, which snapped up Sun to strengthen its portfolio of industry-strength software used by Fortune 500 companies to run everything from e-commerce websites and customer databases to human-resources and product-tracking systems.

“Oracle wants to be the Wal-Mart of the enterprise software industry,” said Brent Thill, director of software research at Citi Investment Research. Oracle Chief Executive Larry Ellison “has a vision for creating an end-to-end vendor that companies can go to for all their technology.”

Oracle said it would pay $9.50 in cash for each Sun share, more than a 40% premium over the $6.69 price that Sun closed at Friday. It’s also nearly twice what the often unprofitable Sun traded for last month, before news that IBM Corp. was considering a run on the company. IBM had offered Sun $9.40 a share. But the companies couldn’t surmount expected antitrust concerns and dickering over a final price, and the talks stalled.

That opened a window for Ellison to swoop in and acquire Sun’s technology before it could get into the hands of IBM, his chief rival in the $15-billion database software business. Although the bulk of Sun’s revenue comes from sales of its server and storage hardware, it was Sun’s software that drew Oracle. Sun owns Solaris, an operating system that powers many large corporate servers, as well as Java, a platform that runs software applications on 4.5 billion devices, including 800 million personal computers and 2.5 billion mobile phones.

Ellison, in a conference call with reporters, called Java “the most important software Oracle has ever acquired.”

Though Oracle made no mention of its plans for Sun’s hardware business, many analysts expect Oracle to jettison that shortly after the deal is scheduled to close this summer. Potential buyers include Hewlett-Packard Co., Dell Inc., EMC Corp. and NetApp Inc., said James Staten, an analyst with Forrester Research.

Oracle estimated Sun would contribute more than $1.5 billion to its operating profit in the first year after the businesses are combined, increasing to more than $2 billion in the second year. Roger Kay, president of consulting firm Endpoint Technologies Associates, said much of that would come from a “St. Valentine’s Day massacre of Sun’s bloated payroll and other costs.”

Sun was founded in 1982 by a group of students and graduates of Stanford University, including Sun Chairman Scott McNealy. It was credited with developing the first “workstation” and pioneered linking computers together into what are now called networks. Many of its products became the backbone of the early Internet. And at one point the company had a market value of about $200 billion.

Sun, however, struggled when the tech boom collapsed in 2000, beset by rivals that could put similar networks together using less-expensive technology.

Oracle shares fell 24 cents, or 1.3%, to $18.82. Sun shares surged $2.46, or 37%, to $9.15.

Oracle, which had $11.3 billion in cash and short-term investments as of Feb. 28, is among an elite group of companies with the wherewithal to strike deals in a harsh economic climate. PepsiCo Inc., which makes its namesake soda, Mountain Dew, Gatorade and Fritos, offered $6 billion Monday to acquire Pepsi Bottling Group and PepsiAmericas, its two largest bottlers.

Like the Oracle bid for Sun, the proposed acquisitions are for strategic reasons and would give PepsiCo control of about 80% of its total North American beverage volume.

Also Monday, British drug maker GlaxoSmithKline said it would pay $2.9 billion to buy Stiefel Laboratories Inc., a private Coral Gables, Fla., business that makes dermatology medications.

“The health and pharmaceutical industries are red hot,” Walraven said.

Last month Swiss pharmaceutical giant Roche said it would pay $47 billion to buy out the shares of South San Francisco-based biotech pioneer Genentech Inc. it didn’t already own.

Also in March, Gilead Sciences Inc., best known for its HIV drugs, said it would buy CV Therapeutics Inc. for about $1.4 billion in a marriage of two Bay Area biotech firms.

And this year, Merck & Co. said it would acquire rival Schering-Plough Corp. for $41.1 billion in cash and stock. In January, Pfizer Inc. said it would buy Wyeth for $68 billion.

Other industries are also showing life, Walraven said.

This month, Bloomfield Hills, Mich., home builder Pulte Homes Inc. agreed to buy rival Dallas-based Centex Corp. for $1.3 billion in a move that many analysts believe foreshadowed a spate of mergers in an industry decimated by the housing slump. The stock transaction would make Pulte the nation’s biggest home builder.

Neill Occhiogrosso of Highland Capital Partners in Boston believes there could be at least one more giant high-tech deal in the offing.

Rumors are circulating in Silicon Valley that Cisco Systems Inc. is eyeing network storage company EMC, he said.

“It would be part of a consolidation in tech. Just as Oracle is moving into hardware with Sun, Cisco is moving beyond networking,” Occhiogrosso said.

However, others believe the climate remains grim for merger and acquisitions for some time to come.

“You are going to see deals get done by companies with strong balance sheets, but what you have not seen is any reentry into the market by the private equity funds, and they made up a significant portion of the deals during the boom years,” said Morton Pierce, chairman of New York law firm Dewey & LeBoeuf’s mergers and acquisitions group.