Dec 28, 2017

Oracle Acquisition of Sun Micro Systems - How things could have been different

Background


Global financial crisis of 2007-2008 hit “Sun Microsystems” really hard and company’s stock lost 80% of value from November 2007 to November 2008, reducing the market value of company to $3 billion – company posted revenue of $13.8 billion in 2007 and had $2 billion cash but revenue fell by 7 % in 2008 and company posted loss of $1.68 billion in 2008 first quarter.  Company planned 15% - 18% layoffs and were looking for white knight; and immediately sharks such as IBM, HP, Cisco, and Oracle started circling to acquire. Sun Microsystems had impressive technology stack including Servers, Hardware, Database, Operating System, Cloud computing, Data Centre, and Java, a programming language using which world was building applications; Oracle and IBM looked this an opportunity for world dominance.  Oracle announced a definitive agreement to acquire Sun Microsystems in April, 2009 at approximately $7.4 billion – Sun stocks surged by 40% and Oracle now owns Java and enters in to hardware market.
Founded in 1982, Sun was initially known as hardware company manufacturing workstations and servers, but also became open source software powerhouse with Solaris operating system, Java programming language, MySQL database, OpenOffice office suite, Network File System, and Virtual Machines.  "The history of the Valley is littered with the dried husks of companies that had great technology but didn't understand the dynamics of the commercial market they were trying to compete in," Charles King, IT Analyst.  Not only the inability to commercialise the software but also the dominant hardware culture in management failed Sun Microsystems and it was stated in a statement by CEO Scott McNealy - "The mistake we made was putting it on our own hardware. If we hadn't metal-wrapped it, it would have been more widely adopted. If we had put Solaris early on an Intel box, Linux never would have never happened."  In 80s, Sun Microsystems sold their SPARC based systems but industry was moving towards open architecture x86 based systems such as by Intel (x86 and SPARC are processors).  With best-in-class software’s such as operating system Solaris, Sun had opportunity to transition to a leading software firm of world but hardware emphasis surpassed the voices supporting Solaris on multiple machines including Intel.  Solaris faced competition from Linux, which was open source and running on Intel and AMD machines.  Indeed, Sun was doing mistake similar to Blackberry and Nokia, selling an integrated machine with hardware and software; Organizations sometimes have to segregate hardware and software and let them prosper separately, but it is not easy such organizations to forgot their core business – Hardware and they keep on trying to sell their hardware powering with their proprietary software’s.  Once low-end Intel chips surpassed Sun’s proprietary chips by 90s. Sun produced Solaris for x86 but it was late and Linux was adopted by industry.  In 1995, Sun released Java – open source programming language that runs on any operating system and on any hardware.  Mature Java came at the same time as dot com boom, Java was choice for serious website makers, and Sun promoted their hardware on the name of Java; but post bubble bust in 2001, sales of Sun’s hardware went into free fall. The famous slogan and advertising phrase during dot-com bubble by SUN – “We put the dot in dot com” really worked and at its peak SUN was rumoured valued approximately $200 billion, Stock prices were in 3 digits in 2000 but as sun sets and share prices of Sun came down to $8-$9 in 2001 post bubble burst.  Sun tried to compete in many hardware and software markets but was placed beyond top three and big acquisitions made by Sun failed such as $2 billion acquisition of Cobalt Networks (maker of Linux-based Server appliances) in 2000 which never produced any dividend, $4 billion acquisition of StorageTek (data storage technology company) in 2005 but Sun performed poorly in storage market, and $1 billion acquisition of MySQL in 2008 to challenge Oracle and IBM in database market but Oracle remained king of databases. Crucial factors for failure for Sun microsystems are summarized as: Unable to monetize Java, Unable to react to open source Linux on time, and not building products for x86.  This is where Oracle comes in with expertise in monetizing things.
Oracle buying Sun was like any other tech M&A: One tech company with cash acquires another tech company with knowledge, capabilities, and passion.  A database company swallows company with servers, storage, cloud, chip, language, operating system, and few more – probably it hurts and so many visionaries and founders within Sun left after Oracle’s acquisition.  Oracle had multiple reasons for acquiring and major ones included ownership of Java – most popular programming language of world, and entry into hardware business.  Oracle got ownership of Java, though Java generated negligible revenue for Sun but Oracle will find new ways to monetize Java such as filing lawsuit against Google for use of Java in Android. Oracle entered into hardware business, which contributed to most of the revenue of Sun, but revenue kept on declining:  $7 billion, $6 billion, and $5 billion in year 2011, 2012, and 2013 respectively, though prior acquisition, Sun posted $12 billion from the sale and service of its hardware products in 2008 and $9 billion in 2009.  Java still remains the top programming language but multiple extensions (frameworks build over open source Java libraries) came and enterprises adopted them instead of directly using Java. Though Oracle got capabilities and vision of cloud computing from Sun but Oracle was unable to utilize it.  Oracle also closed many reputed projects of Sun.
The acquisition of Sun Microsystems by Oracle lacked vision and planning on how to grow and how to maximize the potential of Sun’s hardware and software capabilities and offerings. Oracle has been blamed for slow pace of Java development and disinterest in Java Enterprise Edition.  Oracle stopped selling many Sun boxes and instead focussed on melding software and hardware to sell integrated server machine for its major product Oracle database.


Analysis

Unlike most of the acquisitions done in technology industry in which acquired company has one major product such as WhatsApp, LinkedIn, BEA, and NXP, Sun Microsystems had an array of products and Oracle could have better used them to shape the future of technology and could have become Apple of Enterprise software’s.  

Most of the IT analysts agree that it was right time for Sun to be sold because anyhow Sun was going to lose hardware battle to IBM, HP, and EMC; CEO “Jonathan Schwartz” appointed in 2006 faced series of loses and also got featured the list of worst CEO’s of America; and Sun would have never sued Google as Oracle did to make money.  Few claimed Sun could have become biggest enterprise technology company of world but Jonathan killed that option, he never had a business model for generating revenue from Java, increase hardware market share; layoffs were brutal, and finally he left in 2010 post Oracle acquisition, which few considered “brutality continued”. 

Companies do Strategic Due Diligence before executing the M&A’s.  Strategic Due Diligence is framework with many variants and it is a forward-looking process that helps understand how to create value from acquisition. We will use a very simple version of this framework and analyse the market, the company, and strategy post acquisition to make the investment decision.  We believe Oracle must have done a detailed M&A analysis and detailed Strategic due diligence before acquisition.  Our simpler version will give rough idea of why acquisition was an attractive growth path for Oracle.



Oracle and Sun was a perfect marriage and both needed each other.  Oracle had multiple reasons to buy Sun:
  • Oracle Fusion Middleware, Oracle fastest growing business and product as that time, was built over Java
  • Ownership of two key assets of Sun software: Java and Solaris and also Oracle didn’t wanted Java to go in hands of IBM or Cisco
  • Oracle wanted hardware capabilities and end dependency on HP for Server machines to run Oracle database
  • Ownership of rival open source database MySQL
  • Sun’s huge customer base

IBM and others had similar reasons to acquire SUN. 

Larry Ellison, CEO of Oracle, had a roadmap, post SUN acquisition:
  • Not bother about declining sales of SUN hardware – commodity servers.  Time was for either for very powerful servers or Cloud, and Oracle preferred building high end machines using Sun engineering and hardware. 
  • Abandon non-performing products. 
  • Find new opportunities to generate revenue – probably sue Google or IBM when time is right. 
  • Make potential open source products more successful and introduce commercial version of them. 
  • And few more. 
  • The plan worked in the similar way but Sun’s hardware sales declined, many products and projects started by Sun were abandoned, Key visionaries and founders within Sun left, and Oracle still trying to find ways to monetize open source software’s.  Though Oracle executives claim that Sun acquisition was a success and amount paid was back in 3 years, Oracle could have done lot better with Sun.  


How things could have been different

Oracle could have done much better with Sun than what they did. Oracle had options to become Apple or Amazon along with being Oracle but they were not in mind of Larry Ellison. We will analyse the two options which Oracle could have tried and proved the Sun’s acquisition worth more than multi billion dollars.

Option 1 – Sun under Oracle could have been Apple

Let’s go back in history: In 1979, Xerox denoted few Alto computers to Stanford University, university involved in developing the early internet. Alto inspired the project SUN (Stanford University Network) to develop a relatively low cost modular personal workstation. Ten workstations were built in 1981 and 1982 and University decided not to build anymore but few Stanford research and MBA candidates partnered to form SUN Microsystems and develop SUN-1: first generation of UNIX computer workstations. Important is to know Xerox Alto was also inspiration behind Apple Lisa (first personal computer to offer Graphical User Interface) and Macintosh systems. Steve Jobs was impressed by Alto, made multiple Xerox visit, excited by the mouse driven GUI of Alto, made deal with Xerox for designs.  Though SUN developed workstations (a subset of personal computers but targeted at engineers and professionals) not PC’s but their journey had same start as Apple – Same time and same inspiration. Not to ignore both Sun and Apple were making fine hardware, had charismatic founders, and strong anti-Microsoft beliefs; rumours also suggest there were attempts of mergers and acquisitions between two.  SUN and Apple followed different path and late 2000’s was critical for both: SUN was struggling to regain market share and Apple launched new generation of MacBook’s.  Apple’s strategy always included integrating hardware and software: Machine, Operating System, Applications, and Cloud. SUN under Oracle had similar capabilities: Machines (not PC’s but Servers), Operating System, Applications, Databases, and Cloud Computing.  SUN under Oracle could have been the Apple of enterprise and also entered into new markets such as selling powerful commodity machines. Though later Oracle made a similar move by combining Oracle database and Sun hardware but it was not enough.  Google provided an alternative to consumers with Android OS, software’s, and partnering with hardware manufacturers.   Oracle could have aggressive plans to gain market share in commodity systems with introduction of new integrated machines – powerful personal computers targeted at gamers and professionals with strong software and application support. Open source Java was behind Android, Gaming applications, business applications, dot com applications, and enterprises.  Oracle could have better leveraged potential of Java and SUN’s hardware and software to build a Macintosh like system. 

Option 2 – Sun under Oracle could have been Amazon 

Probably no one saw AWS coming and conquering world till late 2000’s. Amazon launched AWS Cloud computing (Amazon Cloud Storage was available for past few years by that time) in 2006 but it was lot after the SUN’s vision – “the network is the computer” – famous SUN slogan in 1984.  SUN employee knew the network and cloud will be computers one day and predicted cloud computing as early as 1984. Sun was early entrant in Cloud offerings with Sun Cloud and later Sun Grid in 2006 supported by Sun open source technologies like Solaris, Sun Grid Engine, and Java, but Oracle discontinued the project in 2010 and made site network.com inaccessible.  Oracle didn’t saw AWS coming and made very late entry in Infrastructure as a Service market and now lagging lot behind Amazon, Microsoft, and Google. AWS mostly ranked first in Gartner’s magic quadrant in all quarters and AWS is expected to contribute more than 30% in Amazon’s EBITA.  Worldwide public cloud market was expected to be $208.6 billion by Gartner and Oracle could have got major piece of it.  In the same line as Amazon offerings Cloud Storage and Amazon Web Services (AWS or Cloud computing), SUN planned offering first Cloud services: Sun Cloud Storage and Sun Cloud Compute.  On March 18, 2009 SUN announced grand entry in cloud market; SUN also announced API’s (Application programming Interface) for enterprises to build private cloud.  SUN’s cloud computing business unit was formed in July 2008 and SUN announced that Cloud computing will run in parallel with network.com in which network.com will focus more on high-performance computing and research whereas new Cloud offerings will be targeted at developers and enterprises. But SUN Cloud came in turbulent times of SUN and it never saw growth with Oracle management.  Oracle kept on struggling with pricing model.

More alternate options were suggested in the past and will come in future because Java still remains number one programming language in world, Oracle’s integrated server machines are success, Lawsuit against Google for usage of Java is still in court, Sun’s MySQL database is hugely used worldwide now, and Oracle has entered cloud market.  

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