Oracle buys Sun

This is got to be the biggest tech news of the year, so big a news that its woken me up from a long blogging hiatus to write something about it.

The process has costed Oracle $7.4 billion and Oracle expects to achieve operating profit of $1.5 billion in the first year through this acquistion.

Let me try to apply few basics of Mergers & Acquistions I learnt in our finance courses to check if this acquisition was worth the trouble.

The sole purpose of a firm is deliver profits & increase shareholder (SH) value. Any activity conducted by a firm has to adhere to this principle. This rule is applicable to the case of acquistion too: if an acquistion doesn't increase shareholder value, then don't do it.

Now, how to decide if the acquisition is increasing SH value?
Let's say a company called Acme wants to acquire a company called Beta. The acquistion is SH value increasing if Acme's share value post acquistion is greater than value of Acme '+' value of Beta. If this condition wasn't true, the SH is better off holding an Acme share & buying a Beta share from the share market.

This means that Acme must see some level of synergy in acquiring Beta. Generally, there's high level of synergy if the two companies are in the same business so that the acquiring company can achieve greater economies of scale or scope, gain access to new markets or reduce costs by retiring redundant resources. This was the case when Alcatel-Lucent acquired the UMTS business of Nortel or when Oracle acquired PeopleSoft.

But in case the two firms are in different businesses, its difficult achieve scale economies, but the acquistion can be justified by applying better management expertise to the acquired firm.

Lets apply this principle to Sun's acquisition by Oracle. Oracle is into DBMS, while Sun has a large porfolio of products ranging from microprocessors to to high-level prgramming languages. Java, a programming laguage owned by Sun is widely used in user-interface development and by far its most popular product, even though its Solaris operating system & UltraSparc microprocessor are quite well established in the enterprise market.

Sun has an open-source DBMS product called MySQL that has quite a strong following in the FOSS (Free & Open Source s/w) world. MySQL seems to be a good enough reason for this acquistion. Are there any economies of scope (like providing end-to-end "back-end to front-end" solutions) that can be achieved through owning Java and Solaris (other main products from Sun)? The answer to this will be "it depends". If Oracle can achieve higher level of optimization in Java or Solaris systems running on Oracle DBMS, then its definitely a great value-add to the customers. Happy customers generally leads to happy shareholders.. :)

Overall, this seems to be quite a clever acquistion for Oracle and it seems to have to have got the timing right too: in the middle of an economic downturn !!