Finance

This paper will focus on the effects of Oracle-Sun deal on its shareholders by taking into account the difference this deal can create in both the companies business performance and what should be avoided to make Oracle-Sun future sunny. I believe that this acquisition will create immense value to both the companies shareholders. I can support my opinion by studying the impact of their partnership on the competitors, customer market segments and the deals synergistic effects.

The 7.6 billion acquisition of Sun Microsystems by Oracle has proved to be one of the most-talked-about acquisitions in the IT industry. This deal is expected to produce worthwhile benefits for both the companies because after this acquisition, Oracle will be able to offer a complete set of software applications and services by integrating Suns operating system and programming tools with Oracles database and business applications that can highly aid in automating customer service operations and financial management in businesses (Jones, 2009). Moreover, this deal has also made Oracle as the most dominant supplier of services in the IT industry which is also set to give killing competition to IBM especially in European and Asian pacific regions.

This vertical integration has resulted in broadening Oracles portfolio which now offers hardware, operating systems, middleware, databases, applications and consultation services (Guptill, 2009). To strengthen its product portfolio performance, Oracle will majorly focus on Java and MySQL server, which were the main attractions for Oracle to buy Sun. The primary reason behind this is Javas consistent global demand and its already defined integration with Oracles database and middleware applications (Lohr, 2009). Thus, this deal will enable the company to provide complete support from accessing the database to handling and processing the information on desktop, in one stop. Consequently, the customer satisfaction would increase which would not only strengthen their customer base but will also prove to expand it into the prospective markets which currently are grabbed by IBM.

Oracles management is expecting Sun to generate 1.5 billion additional operational profit for the company along with 15 cents per share increase in total profits ( Lohr, 2009). This is truly a sunny future for Sun at least, because the company has been looking for buyers for the last three years and its strong products like Sparc chip was losing its market (Gardener, 2009). Moreover, the impact of this deal can be seen in 36 increase in market price of the stock when the deal finalized. This clearly indicates that shareholders had confidence in the acquisition, thus the demand increased in the expectation of greater ROE in future.

For Sun, this deal will unleash new life for many of its teetering products particularly MySQL, because Oracle does not only intend to invest in improving MySQL but will also innovate it with more features which will surely improve the product performance. Not only this, but to provide a more profound and stronger base to generate revenues Oracle will also integrate MySQL with other Oracle software so that a smooth transition in their portfolio can occur. To achieve its objectives, Oracle has planned to invest 4.3 billion in research and development, so that the real synergistic effects of this deal can be reflected in revenues (Scannell, 2010). This further highlights the fact that Sun alone could not have excelled in RD to such a level in many years to come.

It is an undeniable fact that with this deal, Oracle now has a complete claim on all Suns products and it will surely capitalize on the products strengths, however Oracle will go beyond the Suns independent strength and presence in the market by integrating both the companies products so as to provide a unique blend of services which were never provided before. Although all these gains in revenue cannot be achieved within a year primarily because the change takes time to get implemented. Oracles management has estimated 7 billion of revenue from the acquired product inventory of Sun particularly from the product line of server and hardware storages (Guptill, 2009).  This in itself is a major achievement because Sun for many years could not strengthen this deteriorating business segment. Moreover, it is not only beneficial for Suns stakeholders but, broadening and refining of Suns product lines will help Oracle to have more prominent market presence which will be reflected in its revenue and in turn the market price of the stock.

Another benefit to Oracle which is worth mentioning is that the global database is 20 billion dollar market that has been ruled by Sun for a long time particularly in web server and business databases segments (Etro, 2009). Thus, by this deal Oracle has eradicated its competition in the database market, and has translated it into strength which would need a little effort to sprout into a giant in the market.
All these benefits have obviously been reaped by the shareholders of both the companies which became evident by 36 increase in Suns stock price right after the deal got finalized however, Oracles stock price slightly declined which is not worrisome because, the management is expecting to generate greater revenue by the end of the fiscal year. The company first quarters result in 2010, though showed a decline in earnings but was 6.4 billion i.e. 17 more than the earnings of the same quarter last year (Kanaracus, 2010). But from the last quarter it did decline, primarily because of increased expense in the shape of licensing fees and heavy cash investment to strengthen Suns product line. But this investment is considered as the initial investment which is required for a project in its pre-introductory to introductory phases. Once the project is fueled with the right amount of investment, it starts generating greater returns. A similar fate is expected of Oracle- Sun deal in the coming years. The company, however, managed to show 9 increase in EPS and it has also been predicted by different analysts for the coming year, EPS will average at 0.38 (Kanaracus, 2010).

From the customers point of view, the deal is expected to produce ultra-tech innovations and products and services. Particularly, seeing improvements in products like MySQL and Sun Solaris, customers are surely to get satisfied. Most importantly, such a merger has strengthened the position of the company on competitive grounds which will be reflected in high end performance of the company in various business segments. Oracle will provide the customers with product and services at one point along with offering high class customer support and consultation services. This would mean one stop service for the customers, which is a highly preferred option for corporate customers because it keeps processes simple and easy to handle.

Having shown the bright side of the pictures, like an optimist, it is also important to steer the direction towards issues that need attention, otherwise, the fate of both the companies can be doomed. In other words, I will now discuss the major concerns for Oracles management that should be addressed, in order to make this acquisition decision a success.

Oracle does not hold exceptional expertise and skills to manage hardware segment, because it has not been their forte. Hence, it is vital that Oracle imports skills from Sun to handle the hardware business segment so that products like Sun Solaris can prove its worth, otherwise with the low level of expertise that Oracle has, it will be doomed (McAllister, 2010). Moreover, the company also lacks experience in service management which is vital in IT industry to create strategic customer relationship.

Secondly, Oracle has always been into high profit margin consulting business which helps customers to get rid of technical problems. Such service obviously is charged at a premium despite not much investment and effort (Guptill, 2009). However, with Sun, Oracles management has to invest intense time, efforts and money so that the product lines can generate the desired level of revenues. Moreover, Oracle must invest unified managerial efforts in product portfolio by choosing the best technology available which will not only eradicate the redundancy in efforts but will also provide central leadership for strategic business units.

Lastly, it has been identified that both the companies are more focused on global business which might neglect supporting domestic organizations, and that is why Oracle may become less attractive option for regional customers. In the end, Oracle has to keep a reality check instead of viewing future with extreme optimism (Guptill, 2009). In other words, the management must make sure that their integration of various Sun products and Oracles should be given considerable time period to prove their worth. Returns in such deals cannot be generated within a short span of time. Being too aggressive in their approach might harm them in future when things could not be undone.

In the end, I would summarize all the findings to prove that the Oracle Sun deal can bring in greater returns for all its stakeholders, may those be the management, shareholders, strategic partners or customers. For management, the acquisition will bring in larger canvas to bring innovation and improve performances of variety of products in their diversified portfolio. Moreover, they will also be able to develop sustainable competitive advantage by capitalizing on the synergistic effects of this deal. For customers, it will result in greater innovation, well integrated and better services to support their business processes. For Oracles strategic partners, this deal will provide more investment opportunities within the business, for e.g. HP can form alliance with Oracle to support hardware business segment. Finally for its investors, larger portfolio would imply greater base for revenue, satisfied customers would mean increased revenue, sustainable competitive advantage would mean larger market share and eventually all this will add up to increasing the value of firm after the merger. This will get reflected in the rocketing stock price of the company in times to come.

Undoubtedly, this merger is beneficial for both the companies and its shareholders, however a note of caution is that Oracles management should plan and devise strategies for various business units, so that they can exactly indentify the opportunity cost of investing in various products in the new portfolio. Moreover, being extra optimistic about future returns and margins, will result in the mangement being blinded about the external and internal factors, therefore they should keep their minds and eyes open to gauge the performance. It has been to be remembered that merely escalating the commitment even if things are going wrong is not a wise decision rather corrective measures should be taken at the right time. If sound decisions will not be made, Oracles increase in growth by acquiring Sun Microsystems will turn into the biggest blunder in the IT industry.