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Originally published April 21, 2009 at 12:00 AM | Page modified April 21, 2009 at 9:21 AM

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$7.4 billion Oracle-Sun deal shines light on changing tech world

Sun Microsystems' scramble to find a suitor landed the slumping server and software maker in the arms of Oracle, which Monday agreed to pay $7.4 billion in cash for Sun in a startling marriage, announced Monday, that would transform Silicon Valley and the computing industry.

The Associated Press

Oracle

Founded: 1977 by Larry Ellison and two other programmers, Bob Miner and Edward Oates. Their first product was inspired by IBM's database software research in San Jose, Calif.

Headquarters: Redwood Shores, Calif.

CEO: Larry Ellison

Employees: 86,000

Earnings: Sales of $24.6 billion and profit of $5.7 billion over last four quarters.

Sun Microsystems

Founded: 1982. Began selling "workstations" that offered high-performance computing power for scientists, software developers and other researchers.

Headquarters: Santa Clara, Calif.

CEO: Jonathan Schwartz, since 2006

Employees: 33,556

Earnings: Sales of $13.3 billion and a loss of $1.9 billion over the last four quarters.

The Associated Press

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SAN FRANCISCO — Sun Microsystems' scramble to find a suitor landed the slumping server and software maker in the arms of Oracle, which agreed to pay $7.4 billion in cash for Sun in a startling marriage that would transform Silicon Valley and the computing industry.

The acquisition announced Monday illustrates how some of the world's biggest and richest technology companies are in a race to become one-stop shops for corporate and government customers.

By picking up Sun and expanding heavily into hardware, Oracle would look much more like the company it beat out for Sun — IBM, which appears unlikely to re-enter the bidding.

Heavyweights such as IBM, Hewlett-Packard, Cisco Systems and now Oracle all want to offer a richer mix of technology products. The companies hope to find more hooks into customers and use those relationships to sell other kinds of stuff.

That setup, with a broad mix of services, software and hardware, helped Armonk, N.Y.-based IBM escape financial ruin in the 1990s and become one of the industry's most profitable companies this decade. (For details about IBM's first-quarter results, see item at the end of this story.)

IBM has forked out nearly $13 billion on 40 acquisitions since 2006 to expand its offerings. HP has followed suit, spending $13.9 billion for services provider Electronic Data Systems last year.

Santa Clara, Calif.-based Sun lacked that kind of scale, especially after the tech meltdown of 2001 knocked the company off-balance and led to nearly a decade's worth of financial pummeling.

Sun's best sellers are computer servers and machines that store data on tape. But Oracle and IBM mainly had their eyes on Sun's software.

The deal would give Oracle ownership of the Java programming language, which is a key element of the Internet and runs on more than 1 billion devices worldwide.

Oracle also would take charge of the Solaris operating system, which already has been a platform for many of Oracle's products. Oracle would also get Sun's MySQL database software, which has undercut Oracle and siphoned some sales away.

All these products are open-source, which means their underlying code is distributed freely on the Internet. To make money from the software, Sun sells support contracts alongside those programs.

Like IBM before it, Oracle believes it can make money off those properties better than Sun can, partly by selling other products in package deals.

Forrester Research analyst Ray Wang also believes Oracle could keep MySQL to put pricing pressure on Microsoft, a longtime Oracle nemesis that sells a less-expensive database product.

"With the acquisition of Sun, Oracle is now able to make all of the pieces of the technology stack fit together and work well," Oracle Chief Executive Larry Ellison said during a Monday conference call.

But unlike IBM, Oracle is a surprising suitor because it doesn't make hardware. Although Sun wouldn't be Oracle's biggest acquisition during a four-year shopping spree that has cost more than $40 billion, it may be the boldest.

Some analysts suspect Oracle might try to sell off Sun's hardware divisions if they turn out to be a drag.

Oracle shares sank 24 cents, 1.3 percent, to close at $18.82 in trading Monday. Sun shares jumped $2.46, 37 percent, to $9.15. Microsoft was down 3.1 percent to $18.61.

Oracle's offer amounts to $9.50 per share. That represents a 42 percent premium to Sun's closing stock price of $6.69 on Friday, and is about twice what Sun was trading for in March, before word leaked that IBM and Sun were in buyout negotiations. Net of Sun's cash and debt, the transaction is valued at $5.6 billion, Oracle said.

Oracle has roughly 86,000 workers and Sun has about 35,000. Oracle didn't specify how many people will lose their jobs after it takes control of Sun. The cuts might not be as dramatic as it would have been in an IBM acquisition because Sun has fewer overlapping products with Oracle.

The smaller overlap also could keep Oracle from facing the antitrust objections that IBM likely would have prompted with Sun.

Oracle's takeover came together in just days, and the company expects the deal to close this summer. Sun CEO Jonathan Schwartz needed a deal fast after IBM withdrew its offer this month in a dispute over the terms of a buyout, and on Thursday, Sun reached out to Oracle, according to people familiar with the negotiations.

That prompted IBM to put its previous offer of $9.40 per share back on the table, but Oracle swooped in with the higher price, these people said.

A person familiar with IBM's position said the company isn't likely to rebid for Sun. IBM's chief financial officer, Mark Loughridge, even threw some competitive dirt on the deal during a conference call to discuss IBM's earnings Monday.

"Oracle and Sun have been partnering for two decades — and what's the result?" Loughridge said. "As I look at this and ask myself, 'What's really changed,' I think, 'nothing.' "

IBM's mixed first-quarter results

IBM released its first-quarter results Monday and while its profit beat Wall Street's forecast, sales fell short.

IBM reported after the market closed that its profit was $2.30 billion, or $1.70 per share. That was higher than the $1.66 per share analysts were expecting.

In the same period last year, IBM earned $2.32 billion, or $1.64 per share. Sales fell 11 percent to $21.7 billion, $800 million short of the $22.5 billion analysts polled by Thomson Reuters were expecting.

IBM said the revenue drop would have been 4 percent were it not for the effects of a strengthening dollar. The stock was down 1.5 percent in after-hours trading Monday.

Copyright © 2009 The Seattle Times Company

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