Massucci's Take: Sun Microsystems gambles and wins with Oracle

Even a day after the news broke, this morning I still find the deal surprising: Two weeks after turning down IBM's offer, Sun Microsystems (JAVA) found a buyer in Oracle (ORCL).

The deal was unexpected because Sun appeared be back-peddling when negotiating with IBM (IBM), willing to settle for less money and then having to remind IBM last week it was still for sale. IBM did not bite. In swooped -- a term that seems oddly matched with the name -- white-night Larry Ellison. He saved the day and even paid a bit more than IBM offered for Sun.

Ellison may have saved more than the day. He saved Sun investors from seeing shares drop back down below $5, where they were before IBM showed interest. And Ellison saved his old buddy, and partner in the longtime battle against Microsoft and Bill Gates, Sun Chairman Scott McNealy.

Sun's McNealy may have had egg on his face, and angry Sun shareholders to contend with, if a sale of his company wasn't made after turning down IBM. McNealy reportedly led Sun's board to vote down IBM's offer on April 4, after which IBM withdrew the offer on April 6.

Last week, Sun reminded IBM that it wanted to negotiate. Silence came from IBM. Wonder if McNealy then picked up the phone and called Ellison to ask if the two companies could arrange a deal? Oracle had said it wasn't interested in negotiating for a company in merger talks. IBM's loss of interest opened the door for Oracle.

Ten cents a share more than IBM's offer is all it took for Sun to say yes to Oracle; Sun shareholders will receive $9.50 a share. While it's just a bit better than the $9.40 a share that IBM was reportedly offering, it was 42% more than Sun's closing price on Friday, April 17. Sun's board, which voted unanimously to accept Oracle's offer, must have been racing to get the deal approved and take the money.

What held up the deal between Sun and IBM was that Sun reportedly wanted assurances that IBM wouldn't back out of the potential merger if there were regulatory problems. The IBM bid for Sun had this drawback: the server business could have been seen as growing too large. With Sun and Oracle, that isn't an issue.

Oracle CEO Ellison said in a release today that "Oracle will be the only company that can engineer an integrated system -- applications to disk -- where all the pieces fit and work together so customers do not have to do it themselves."

There's the value for Oracle, which covets Sun's software and is happy to add its hardware sales.

The purchase of Sun Micro "positions Oracle much better against IBM now because Oracle can offer hardware," David Rudow, research analyst at Thrivent Financial for Lutherans, told Bloomberg Television today. "This positions Oracle better in the overall tech arena."

Ellison, known for his habitual hype, called Sun's Java "the most important software Oracle has ever acquired," according to today's DailyFinance story on the merger. Some of Oracle's products use Sun's Java language and software. Sun's Solaris operating system should also help boost Oracle's offerings.

I wrote on April 6 that Sun should take IBM's money and run. I was wrong. I didn't believe Sun had a backup plan or another suitor waiting in the wings to buy the company. True, Sun may have gotten lucky with the Oracle deal, but it makes more sense from Sun's perspective because there's little risk its shareholders won't get paid after government regulators take a look.

And they got 10 cents more on top of that. Nice going, Sun.

Surprise was what many tech analysts expressed today after hearing about the deal. You have to admire Sun's adept negotiating. When all look lost for Sun, they pulled a Larry Ellison ace that no one expected.

Anthony Massucci is a senior writer for DailyFinance. He previously covered technology companies for Bloomberg News.

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