Oracle to buy Sun Micro, enters hardware market

A Sun Microsystems sign is pictured at the company's headquarters in Santa Clara, March 18, 2009.

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 believed 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 against IBM, 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 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 second fiscal quarter on December 28, according to Sun.

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

Shares of Sun jumped 35.7 percent to $9.08 in morning Nasdaq trading, while Oracle shares fell 3.7 percent to $18.36. Shares of IBM, which did not immediately return calls for comment, fell 1.8 percent to $99.49 on the NYSE.

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 equipment.

Catz said the acquisition, which the companies expect to close this summer, will add at least 15 cents per share to earnings in the first full year after closing.

It will be more profitable on a per share basis in the first year than Oracle had planned for its previous purchases of BEA, PeopleSoft and Siebel combined, Catz said.

LONG FRIENDS

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

Oracle and Sun have been partners for more than 20 years: Oracle's database and related software already operate tightly with Sun's Java software and Solaris operating system.

"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."

Sun would add more than $1.5 billion to Oracle's operating profit in the first year, rising to more than $2 billion in the second year, Oracle said.

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

The company has been looking for a buyer for months, according to bankers, with IBM, Oracle, HP, Dell and Cisco having all been cited as possible buyers.

Analysts have said the sale of Sun could signal a new wave of mergers and partnerships in the data center market as companies strive to provide more comprehensive services that tie hardware and software offerings together.

"It moves Oracle more into the competition with HP and IBM and Microsoft. It makes them a player in the space," said Shannon Cross of Cross Research. "It gets hardware, which should be interesting to see since Oracle doesn't make things. It's going to give them access to customers who weren't using the Oracle database."

Talks between Sun and Oracle began late on Thursday, according to a source with knowledge of the matter who spoke on condition of anonymity.

The companies said the transaction is valued at $5.6 billion net of cash and debt. Sun's board had unanimously approved the deal, which is subject to shareholder and regulatory approval.

"It makes sense at a certain level, but the question is: How do you get the companies to fit together? We don't quite get that yet," said Tim Ghriskey, chief investment of Solaris Asset Management, whose New York-based firm manages about $2 billion and holds shares in neither company.

(Additional reporting by Franklin Paul and Ritsuko Ando in New York, Tarmo Virki in Helsinki; Writing by Tiffany Wu; Editing by Derek Caney)