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Originally published January 31, 2010 at 11:02 PM | Page modified February 1, 2010 at 9:18 AM

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Oracle's playbook for Sun Microsystems honed by series of acquisitions

Oracle may not have much experience selling hardware, but the giant Redwood City, Calif., software company is counting on turning Sun Microsystems' business into a profitable operation by taking the same tough-minded approach that succeeded with dozens of smaller acquisitions in the last five years.

San Jose Mercury News

Oracle may not have much experience selling hardware, but the giant Redwood City, Calif., software company is counting on turning Sun Microsystems' business into a profitable operation by taking the same tough-minded approach that succeeded with dozens of smaller acquisitions in the last five years.

While executives say they're focused on building high-end computer systems that will improve the performance of customers' data centers, Oracle Chief Financial Officer Jeff Epstein minced no words as he described the financial strategy behind his company's $7.4 billion acquisition of Sun.

"Oracle is very good at saying no," Epstein told Wall Street analysts just hours after Wednesday's announcement that Oracle had completed its purchase of the financially struggling Santa Clara computer maker.

Oracle intends to shrink Sun's catalog — by trimming numerous variations of similar products and services — and halt Sun's practice of filling special orders for unprofitable systems with unusual features.

Some customers may not get what they want, Epstein acknowledged. "We don't want to sell products that we lose money on," he said.

In all, Epstein described a number of ways in which Oracle plans a more hard-charging approach than Sun, as it tries to reap $1.5 billion in annual operating profit from a business that posted a $2.2 billion loss in its last fiscal year.

In addition to focusing on high-end systems with higher profit margins, Epstein said Oracle plans to standardize myriad back-office systems at Sun, such as purchasing and human resources, while streamlining its manufacturing process and hiring an army of new sales people who will be paid more for selling higher-margin products and services.

Those moves, from a playbook that Oracle has honed while carrying out 60 acquisitions since 2005, will make the new operation profitable without laying off thousands of workers, Epstein said.

Oracle Chief Executive Larry Ellison said Wednesday that the company will hire 2,000 engineers and sales people, while laying off about 1,000.

Few financial specifics

Analysts said it will take some time to know if Oracle's strategy will work, since the company provided few financial specifics. But some said Oracle's ideas make sense.

"It's definitely doable," said server-industry analyst Jean Bozman of the IDC research firm, referring to Oracle's plan for streamlining a Sun manufacturing and distribution chain that had become unwieldy over the years.

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Epstein said Oracle will reap considerable savings by building systems as they are ordered and shipping them directly to customers, instead of building them in advance and keeping a sizable inventory in warehouses. He added that Oracle will let independent distributors assume the cost of keeping inventory on hand.

Oracle also plans to cut costs by automating Sun's customer support, using e-mail and the Web to cut down on call centers staffed with expensive human operators, Epstein said.

Higher-margin products

Meanwhile, Oracle plans to focus its marketing and sales efforts on higher-margin products and support contracts — a familiar strategy for Oracle, which draws large profits from software maintenance and license renewals.

While Sun shared profit with third-party distributors that sold many of its products, Epstein said Oracle will sell directly to its largest customers, which buy more high-end systems. And where Sun paid commissions based on total sales, he said Oracle's sales people will earn commissions for selling the most profitable products.

"They're going to figure it out pretty quickly," he said. "And we think they're going to sell a lot more of the high-margin products."

Oracle's sales force will face stiff competition from IBM and Hewlett-Packard, which have been aggressively wooing Sun's customers in recent months.

But analysts say Sun still has a strong base of customers using its high-performance Sparc servers.

Sun "has a loyalty base in the data center, much like Apple has with consumer electronics," said Laxmi Poruri of Primary Global Research.

"And this is where building higher-end servers will probably increase margins" for Oracle.

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