Oracle-Sun changes the tech game

The proposed merger will bring layoffs and new competitive battles for Silicon Valley's biggest players.

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By Adam Lashinsky, editor at large

SAN FRANCISCO (Fortune) -- Oracle (ORCL, Fortune 500) pounced on Sun Microsystems a week ago, agreeing to buy the battered server maker for $5.6 billion, excluding Sun's cash. On the surface, the tech world responded relatively quietly to Oracle's bombshell by getting about the business of reporting earnings. Behind closed doors, however, the entire industry has been turned topsy-turvy. One bold and unexpected deal has changed everything, and the ramifications will play out increasingly dramatically for months. Consider how the move affects the mightiest in the industry.

Oracle. Like Hewlett-Packard (HPQ, Fortune 500) CEO Mark Hurd, Oracle chief Larry Ellison understands that a broad product line and operational efficiencies in a commoditized industry lead to fat profits and a compelling pitch to customers. Selling enterprise software and hardware is a relationship business, and with Sun, Oracle gets more relationships and has more to sell to the customers it already knows. More than that, Oracle has proved an adept cost cutter in an industry known for growth, not thrift. Bernstein analyst Toni Sacconaghi estimates that to achieve the $2 billion in operating profit Oracle says it can from the Sun purchase that Oracle will need to cut 5,500 to 10,000 jobs. People forget that plenty of those cuts will come at Oracle too, which uses its big acquisitions as excuses for blood-letting throughout the organization.

SAP. Suddenly SAP, the German software company that dominated its corner of the industry just a few years ago, is in play. That's because Oracle has completely outmaneuvered it, becoming a more complete and therefore more powerful player. The three most likely bidders for SAP are IBM (IBM, Fortune 500), HP and Microsoft (MSFT, Fortune 500). It's worth looking at the likelihood of each stepping up to what would be a minimum $50-billion transaction.

IBM. The venerable hardware maker has done an admirable job of moving out of heavy iron and into software and services. It bid first for, but couldn't close, the Sun acquisition. IBM certainly could come back at Sun, but in a classic instance of game-theory behavior IBM knows it's up against an adversary with a demonstrated willingness to play the "crazy card." (Read about Oracle's protracted battle for PeopleSoft to get a sense of the lengths to which Ellison will go when he decides he wants something.) Instead IBM may be pushed to do something even bolder now that it is competing more directly with Oracle.

HP. The conventional wisdom is that HP couldn't do another large transaction because it is busy digesting EDS. Nonsense. HP had begun to think of IBM as its one true competitor. Now along comes longtime partner Oracle as a credible threat. The quickest -- if most expensive -- way for HP to transform its pipsqueak software business is to buy SAP -- before IBM does.

Microsoft. The faltering giant danced with SAP years ago but didn't pull the trigger. Now Microsoft is locked unprofitably in a death battle with Google. In the last three quarters, Microsoft's online business has posted operating losses of $1.5 billion, including a $575-million loss last week. That's a massive amount of money to lose, even for Microsoft. I've chronicled Microsoft's search-related red ink here and here. Microsoft insists it is playing for the long haul, and CEO Steve Ballmer last week disparaged Oracle's purchase. Microsoft better have something to show for its investment in online advertising because with each passing year it loses a little more relevance in software, a shocking development in an industry Microsoft helped invent.

Cisco. A wild card, Cisco is rapidly transforming itself into something unrecognizable just a few years ago. Cisco already announced a modest server offering, and it long has considered itself a software maker though it sold the code it writes on routers and switches. Cisco conceivably could bid for Sun or SAP. It clearly sees itself increasingly in competition with IBM and HP.

Fun times have arrived in an industry that frankly had gotten boring.  To top of page

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