Oracle to buy Sun Micro, enters hardware market

By Jim Finkle

BOSTON (Reuters) - Oracle Corp plans to enter the computer hardware market by buying Sun Microsystems Inc for more than $7 billion, swooping in after Sun's talks with IBM fell apart.

The announcement on Monday surprised many Oracle watchers, who believe the company can boost profitability at Sun's software businesses but were unsure if it can be as successful with Sun's hardware unit amid stiff competition from International Business Machines Corp, Hewlett-Packard Co, Dell Inc and new entrant Cisco Systems Inc.

"It's an out-of-the-box, left-field type of a deal because Oracle is buying a predominantly hardware business," said Jefferies & Co analyst Ross MacMillan. "The push-pull of the deal is the uncertainty of the hardware business with the earnings accretion of the software business."

Oracle Chief Executive Larry Ellison and Sun Chairman Scott McNealy are two Silicon Valley pioneers who have become close friends over the past two decades as their companies worked together to take on rivals like Microsoft Corp and IBM.

Oracle's database and related software already work closely with Sun's Java software and Solaris operating system.

The deal would make Oracle the world's fourth-largest maker of servers, with the No. 2 slot in the high-end of the market, which was worth about $17 billion last year. It is already the world's No 2 maker of business software after IBM.

Oracle will pay $9.50 a share for Sun, which values the high-end server and software maker at about $7.06 billion, based on 743 million shares outstanding as of the end of its fiscal second quarter on December 28, according to Sun.

Sun previously rejected IBM's offer to pay up to $9.40 a share, according to sources with knowledge of the matter.

On Nasdaq, shares of Santa Clara, California-based Sun jumped 36.77 percent to $9.15, while Redwood City, California-based Oracle fell 1.26 percent to $18.82.

ACCRETIVE IN 1ST YEAR

Sun rose to prominence in the 1990s but never fully recovered from the dot-com bubble burst in the early 2000s, when demand for its high-end servers cratered.

Oracle President Safra Catz said on a conference call that Oracle intends to make the hardware division profitable. Sun's top-selling products are high-end servers and storage gear.

Catz said the acquisition, which the companies expect to close this summer, will add at least 15 cents per share to earnings and $1.5 billion to operating profit in the first full year after closing. It will be more profitable on a per share basis than Oracle had planned for its previous purchases of BEA, PeopleSoft and Siebel combined, Catz said.

"The deal would strengthen Oracle's position against IBM. Oracle has done a good job on acquisitions it has done earlier," said Robert Jakobsen, analyst at Jyske Bank in Copenhagen. "It makes sense also historically. Oracle has been more successful commercializing software than Sun."

The companies said the transaction is valued at $5.6 billion net of cash and debt. Sun's board -- which includes a seat held by its top shareholder Southeastern Asset Management with 22 percent stake -- had unanimously approved the deal, which is subject to shareholder and regulatory approval.