How badly does Oracle, a leader in business software, want to be the one-stop shop for corporate technology purchases? Enough to spend $7.4 billion to buy an ailing Sun Microsystems and get into the computer hardware business.
The deal is the latest sign that technology’s largest players are willing to spend their huge cash hoards to accelerate a far-reaching consolidation of the industry, The New York Times’s Ashlee Vance reports from San Francisco.
Giants like Hewlett-Packard, Oracle, Cisco Systems and I.B.M. want to woo customers tired of dealing with too many suppliers, and each company wants to bolster its offerings to compete for a larger share of customer budgets.
“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,” Oracle’s chief executive, Lawrence J. Ellison, said in a statement.
Oracle agreed to acquire Sun, which owns valuable software and hardware assets, for $9.50 a share. Oracle beat out rival I.B.M., which ended serious acquisition talks with Sun about two weeks ago.
The drive to consolidate has made life difficult for independent companies like Sun, and the fall of such an industry stalwart highlights the mounting pressure on smaller firms in the computer, storage and software industries to find buyers. Even larger companies like EMC and Dell could be vulnerable, industry analysts say.
“I believe that we are in the fifth inning of a nine-inning consolidation game,” said William T. Coleman III, a former Sun executive and co-founder of BEA Systems, who is now the chief executive of a software start-up, Cassatt. “It’s not over by any stretch of the imagination, and there are drastic things that still have to happen.”
Five years ago, Oracle bought PeopleSoft for more than $10 billion, igniting a furious rush to scoop up other business software makers. Oracle alone has since bought more than 40 other companies, spending close to $15 billion for BEA and Siebel Systems alone.
Many of the companies purchased by Oracle had carved out a niche for themselves during the Internet build-out, providing unique functions that assisted a rapid infrastructure expansion. In the years after the dot-com bust, however, customers grew weary of visits from hordes of software salesmen peddling isolated wares. A simpler model evolved, in which a handful of companies like Oracle, I.B.M. and Hewlett-Packard bought dozens of smaller players and then competed to sell most of the software needed to run a modern business.
“The core just keeps getting denser and denser,” said Randall N. Spratt, the chief information officer at McKesson, one of the nation’s largest health care companies. “We welcome large-scale players at the core.”
While software companies led the last round of consolidation, the hardware industry now appears poised for its own reshaping. “I think we’re at an inflection point,” said Patricia C. Sueltz, a former I.B.M. and Sun executive, who runs the start-up LogLogic.
For example, Rackable Systems, a smaller server computer maker, announced plans this month to buy Silicon Graphics for $25 million. Like Sun, Silicon Graphics started in 1982, and had been one of the fastest-growing businesses in America during its heyday, selling billions of dollars of computers a year.
As the computer business has matured, companies that handcraft products for top performance face a harsh reality: Standard equipment can now handle most business tasks, and what matters most to customers now is large scale — and the low prices that come with it.
Over the last decade, Hewlett-Packard has driven much of the infrastructure consolidation through a series of large acquisitions. It bought Compaq Computer in 2001, which affected both the PC and server markets as other companies fought to expand and match H.P.’s reach. For example, the Chinese computer maker Lenovo bought I.B.M.’s PC business, and Acer, based in Taiwan, acquired Gateway, which had already acquired eMachines.
Last year, Hewlett-Packard purchased Electronic Data Systems, one of the largest technology services companies, in a bid to counter I.B.M.’s immense services organization. The E.D.S. purchase also threatened the businesses of Sun and Cisco, which have sold large amounts of equipment to E.D.S.’s customers.
Most recently, the largest technology companies have decided to encroach on each other’s turf. For example, H.P. has increased its investment in networking technology, hoping to pull business away from Cisco, and Cisco has countered by building its own server products. Oracle’s purchase of Sun is an even more drastic lurch into its rivals’ territory, as Oracle will find itself in the unfamiliar position of selling hardware, while also picking up Sun’s prized software assets, like its Solaris operating system, Java programming language and open-source MySQL database.
Lurking behind all of these moves is the rise of virtualization software, which makes it possible to shuffle software around a data center rather than keeping it locked onto specific physical systems. The technology has eroded the boundaries between server, storage and networking hardware, forcing the large players to have a hand in all of these businesses. Both Oracle and Sun have made their own virtualization technology in a bid to catch up with the market leader VMware.
The recent uptick in the stock market may be enough for companies that had been sitting on the sideline to spring into action. Bullish analysts postulate that valuations of vulnerable tech companies will not go much lower.
With $34 billion on hand, Cisco has more funds at its disposal than any other technology company and has been mentioned as a suitor for storage makers like EMC and NetApp. H.P., too, has come up as a potential buyer for NetApp. And Dell has pledged to spend some of its billions on server, storage and services companies. “I think people have been a little more fearful, but there’s still a ton of cash out there,” said Peter Falvey, the co-founder of Revolution Partners, an investment bank centered on technology companies.
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