In just over a week after talks between IBM and Sun Microsystems collapsed, Oracle CEO Larry Ellison stepped in to close one of the biggest deals ever in IT. On Monday, Oracle announced that it will take over Sun in a friendly bid priced at $9.50 per share, valuing Sun Microsystems at just over $7 billion USD. The deal was a bright spot on Wall St. where the overall market was down over 250 points at close. Analysts are suggesting that this could lead to a 40-70% cut in jobs at Sun, whose financial problems obviously spurred the deal.

Like Silicon Graphics in bankruptcy again and now merging with Rackspace, Sun has been unable to recover from the dotcom bubble of 2000-2001. The biggest problem appears to be that Sun was unable to redesign and manufacture next-generation servers without falling behind other hardware companies and chip makers, nor were they able to monetize sufficiently their software platforms. Thus, the gains for Oracle are huge – the Java programming language, the MySQL database platform, and the Solaris operating system, all owned by Sun are the foundation of the internet in many instances, old and new.

Oracle now owns and manages its own legacy database platform, plus MySQL and InnoDB, another open source standard that is rising quickly in popularity. Marten Mickos, the former CEO of MySQL, was quoted in Forbes with these comments on the deal:

“It’s amazing, and not entirely surprising. Oracle has the money and is a long-term, strategic player. They went into applications to compete with SAP and have successfully done this. Now they want to out-compete Microsoft.”

“Microsoft’s database business is the fastest growing. Oracle can use MySQL to achieve a stronger developer community.”

For many people, this deal “feels better” and seems to make more sense than a Sun-IBM merger, because both companies are ideologically aligned and operate as traditional allies in Silicon Valley politics. But Oracle has no history in hardware production along the lines that Sun maintains. Business Week reports that Oracle earns margins of 46% in its software development, sales, and maintenance contracts. Even at its best, server & hardware manufacturing would be a significant drain on this.

“Java is key to a set of Oracle business applications called Fusion, designed to stitch together the array of programs Oracle has scooped up through its acquisition binge. Controlling the software in house could help Oracle assure customers of a smooth transition from older products to new ones. And owning Java gives Oracle a counterweight to Microsoft (MSFT) as it tries to convince more developers to incorporate its database, middleware, and other software into their products.”

“Oracle is expected to generate more than half of its estimated $23.1 billion in 2009 sales from technical support and ‘maintenance’ of products its customers have already licensed. Those support contracts carry profit margins of about 90%. Controlling Java ‘is all about future maintenance streams,’ says Citigroup’s Thill. ‘This will create stickier lock-in for the Oracle installed base.’ ”

Though many suggest Oracle may be better to sell off Sun’s hardware division and focus on maintaining and expanding the Java, MySQL, InnoDB development & services platform, Oracle is suggesting it will attempt to maintain the server division and is looking at producing “stacked” machines, or servers pre-loaded with custom operating systems and software for large corporate / research requirements. Currently Sun is the 4th biggest server manufacturer, behind IBM, HP, and Dell.

“Amitabh Goel, a securities analyst at First Global, said he was ‘not very positive on the acquisition, as it remains to be seen how Oracle will run a hardware company, with Sun’s market share on a declining trend.’”

“But the purchase was ‘in line with Oracle’s goal to gain share in the data centre market and offer more integrated end to-end products,’ he added.”

” ‘With the acquisition, Oracle will now be able to offer an integrated stack of hardware, software, and services to its customers.’ ”

“During a conference call with analysts on Apr. 20, Oracle CEO Larry Ellison called Java ‘the single most important software asset we have ever acquired.’”

“Scott McNealy, chairman of Santa Clara, California-based Sun, which employs more than 33,500 people worldwide, hailed the merger as ‘an industry-defining event’. “

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Oracle buys Sun – To Provide Integrated Hardware, Software, Services around Java