A Fitting Denouement for Sun's Assets with Upside for Oracle Shareholders

The announcement of Oracle’s (ORCL) proposed acquisition of Sun (JAVA) offers a great to profitably leverage this former titan’s amalgam of emerging and legacy technologies, for several reasons.

First, Sun and Oracle have together contributed to the most robust Enterprise Unix computing platform available, and Oracle has already acquired other key constituents of this stack (including PeopleSoft, BEA and Hyperion).

Moreover, Oracle seems best positioned to dis-amalgamate Sun’s Software and Systems businesses to offer a bundle that is truly required by their many shared customers. And I believe it is well positioned to capably foster the promise of Java in the Enterprise.

Based on management comments, it is also plain they truly appreciate the value of Sun’s Sparc platform, at the center of which lies Solaris.

Plainly, Oracle’s acquisition of Sun offers an optimal solution to latter’s strategic conundrum—i.e., how to display the profitable growth of its software offering through the intense investment burden of the Sparc/Solaris platform.

And just as clearly, Oracle’s management has a plan to do so quickly, promising an annualized $1.5 billion in non-GAAP operating profit and an incremental 15 cents first-full year earnings.

These targets seem ambitious indeed, suggesting a roughly 10 percentage-point improvement in margins. Still, as a strategist, I see various means to achieving these ambitious goals. And having closely followed and invested in both companies over the years, I am pretty confident they will achieve them.

The key question to me is just how the burdensome assets will be provisioned to reveal the underlying profitability of the acquired businesses while allowing whatever development the platform will continue to require.

So what do we do with Oracle shares, now that they have embarked on this acquisition? I have been a buyer in the teens and a seller in the 20’s for quite a while, a strategy that works given their strong execution. This will be likely be a more difficult integration, but management has the levers they need and (I assume) a good strategy in which to use them.

Thus at these levels, I am happy to sit tight. Once the precise characteristics of the acquired assets become clearer, I am guessing I’ll justify a higher peak valuation for the stock.

Disclosure: No positions

Comments

[Jeopardy:]

PeopleSoft and Hyperion have nothing in particular to do with the unix computing platform. They are applications (except Essbase), way on the top of the enterprise software stack. BTW, why PeopleSoft and Hyperion? Why not some other pieces Oracle acquired that are actually further down the stack and are more "platform"?

Apr 28 04:26 AM

[BeachRider:]

It looks like the ORCL/JAVA deal with close this summer (after late-June). JAVA is going to announce another quarterly loss today. It won't affect the JAVA-stock, so long as ORCL keeps it $7.4Bn price, but it may impact the usefulness of the Sun-assets when Oracle takes over. I doubt that new-sales or Oracle are much more than 10% on new Sun-SPARC boxes. The low-GHz, high core-count machines that are Sun's current-focus aren't particularly good for database machines, anyway. If ORCL can resurrect machines that make its profitable database shine, then ORCL will invest in Niagara. I still don't hear anything about how ORCL will inflate sales for the STK-legacy stuff. I will stay tuned!

Apr 28 10:58 AM

[willman:]

you might want to fix the lede -- "...offers a great (insert noun here) to profitably leverage ..."

Apr 29 11:49 AM