Oracle to buy Sun for $9.50 a share
Business software company says it will acquire server maker's stock for $7.4 billion.
NEW YORK (CNNMoney.com) -- Business software maker Oracle Corp. said Monday it has entered into a definitive agreement to buy server builder Sun Microsystems in a deal worth $7.4 billion.
Oracle said it will buy Sun common stock for $9.50 per share in cash, a 42% premium from Friday's closing price of $6.69.
After accounting for Sun's cash and debt, the deal's value is $5.6 billion, the companies said.
The announcement comes after Sun reportedly rejected a $7 billion buyout offer from IBM (IBM, Fortune 500) earlier this month.
The Redwood Shores, Calif.-based Oracle said it expects Sun to contribute over $1.5 billion to its operating profit this year, and over $2 billion in the second year.
On a per share basis, Oracle expects Sun to add 15 cents to its adjusted earnings in the first full year after closing. The deal is expected to close this summer.
Shares of Oracle (ORCL, Fortune 500) fell nearly 5.5% to $18, while Sun (JAVA, Fortune 500) soared nearly 36% to $9.10 in early trading.
"The acquisition of Sun transforms the IT industry," said Oracle chief executive Larry Ellison, in a statement. "Our customers benefit as their systems integration costs go down while system performance, reliability and security go up."
Oracle, which has made 52 acquisitions since January 2005, said it sees "strategic customer advantages" to owning two of Sun's most popular software products: the programming language Java and the Solaris operating system.
"This is a fantastic day for Sun's customers, developers, partners and employees across the globe," said Jonathan Schwartz, Sun's chief executive. "[By] joining forces with the global leader in enterprise software to drive innovation and value across every aspect of the technology marketplace."
However, the deal belies Oracle's need to prevent Java from being controlled by a rival software company, according to Brent Williams, an analyst who covers the tech sector for The Benchmark Company in New York.
"This deal strikes me as an extremely defensive move," Williams said. "This is all about who owns Java technology, which is the core of most enterprise applications."
Williams said rival buyers, such as IBM, could have made Java a non-proprietary "open source" software. That would have posed a "major price threat" to Oracle, the world's largest enterprise software company, he added.
On the other hand, the deal reflects the tech industry's move towards more bundled products, according to Shaw Wu, an analyst at Kaufman Brothers Equity Research.
"We believe this [acquisition] supports our industry thesis that vertical integration works, meaning having an integrated stack of hardware, software, and services to sell to customers," Wu wrote in a research report.
According to Wu, companies such as Hewlett-Packard (HPQ, Fortune 500), IBM, Apple (APPL), and blackberry maker Research in Motion (RIIM) have had success with such models.
Still, analysts said questions remain about Oracle's ability to digest Sun's server business, which has been losing market share to larger rivals such as IBM and H-P.
The deal is subject to Sun stockholder approval, certain regulatory approvals and customary closing conditions. 
