Can Oracle Make a Success of Sun?

I don’t know about you but I was pretty surprised when Oracle announced its intention to buy Sun Microsystems. It’s not just the thought that Sun’s business has been suffering from a slow and steady decline. It’s also the fact that Oracle has NEVER been in the hardware business. It’s a fairly radical move for a stand-alone software company to make a big bet on hardware. Most tech companies are moving in the opposite direction, dumping hardware assets and bulking up in software and services, a la IBM and Hewlett Packard.

But the more I think about it, the more this deal could actually make sense. For one, Sun is a software company, and many of its most valuable assets are in software. Namely, the Java programming language and the Solaris operating system. Moreover, by buying Sun, Oracle scoops up the number one rival in its core database business–open source database provider MySQL. This shrewd counter-attack alone may justify the price of the deal. Lastly, with Java under its wing, Oracle gets more leverage over IBM, which over the years has made a big investment in Java to counter Microsoft, and can offer more integrated technology solutions to its customers.

Still, Oracle has to overcome three main challenges to make this deal a success, as my colleague Aaron Ricadela noted in his story today. One, Oracle has got to find a way to wring more money out of Java without alienating its customer base. Two, Oracle needs to prove it can run a hardware business. Three, it has to do some pretty nifty financial engineering, including a massive layoff of more than 10,000 people, to make the numbers work over the long term.

As one top tech CEO told us recently, Sun will be an accretive deal for the first 18 to 24 months, thanks to the cost cuts that can be made. But the real challenge will come after when those gains run out, and the server business continues to decline.

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