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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Startups in a Downturn

Today, BusinessWeek published my feature story, “Startups in a Downturn.”

It’s about the idea that great companies can be built during bad times–an idea I’ve been talking about a lot lately on my book tour. It seems to have struck a bit of a nerve. It was the most emailed story on the site and the third most read story. This historical oddity occurred to me during the research for my book when I realized that American Research and Development invested $70,000 in the 1957 recession in Digital Equipment Corp., which turned out to be its best investment ever.

Here’s the top of the story:
Startups in a Downturn
Entrepreneurs who helped build their startups into tech stalwarts—companies like Cisco, Oracle, and Google—share lessons on how to thrive during tough times

December 1987 was no time to be raising money for a startup. Computer engineer Len Bosack was trying to attract funding for a young enterprise called Cisco Systems (CSCO). But the stock market had just crashed and the Dow Jones industrial average had plummeted 40% since October. Gun-shy venture capitalists either didn’t get the newfangled technology or deemed it too risky.

Making matters worse, Bosack was running low on the savings he had used to bootstrap the business, and competition was gaining steam. It wasn’t until this 75th meeting that he found a receptive audience. The willing financier was Donald Valentine of Sequoia Capital, a venture capital firm in Silicon Valley. On Dec. 14, two months after Black Monday, Sequoia invested $2.5 million in Cisco. “Valentine’s reasoning was pretty simple,” recalls Bosack, now CEO of telecom gear-maker XKL. “It doesn’t matter what they are. They are selling stuff in a bad market. With a little bit of capital and more experienced help they should be able to do better.”

Better is just what Cisco did. By the time of its initial share sale three years later, in February 1990—during a recession—the maker of telecom networking equipment was worth $224 million. Within a decade, Cisco Systems had become one of the world’s most valuable companies.

GREATNESS CAN EMERGE FROM A SLUMP
Today, some of America’s sharpest financiers and entrepreneurs say Cisco’s story holds a profound lesson easily forgotten amid financial turmoil: Great companies can be built during tough times. “For us, Cisco is always the company we think of when we think about bad times,” says Michael Moritz, a general partner with Sequoia Capital who was a young associate when the firm made its investment.

Cisco is just one example. In the history of technology, many other great companies either were founded during downturns or forged business models during bad times. In 1939, at the tail end of the Great Depression, two engineers started Hewlett-Packard (HPQ) in a garage in northern California. During the recession of 1957, Digital Equipment, the first computer company to challenge IBM (IBM), set up shop in a Civil War-era wool mill, sparking a high-tech boom in Massachusetts. “It makes sense to do research and development counter-cyclically,” says Tom Nicholas, associate professor in the Entrepreneurial Management Group of Harvard Business School. “Recessions can be really useful strategic opportunities.”

Click here to read the rest of the piece.

Did Steve Jobs Miss the Bullseye at Macworld?

BusinessWeek technology reporters Heather Green, Arik Hesseldahl, Catherine Holahan and Spencer Ante discuss Macworld, whether the tech sector is headed for a downturn, and the billion-dollar-plus buys of MySQL and BEA in this week’s broadcast of the Digital Dish.

My colleague Arik is bullish on the future prospects of Apple’s new online movie rental service. But I am less optimistic. Apple TV will get better and do better but it’s not a groundbreaking product like iTunes/iPod or the iPhone. Jobs can’t ride into the local square and save the day because there are already a few sheriffs in town. Netflix is the dominant player in online movie rentals and they are offering a download service for FREE with 6,000 movies and TV shows right now. Interestingly, the top five most-watched shows are all TV programs, according to the list on the NetFlix Web site on January 19: Heroes, The Office and 30 Rock.

As for Macworld, the maestro Jobs turned in a middling performance. He was due for one, no doubt. That’s the nature of creativity. Every film Martin Scorses makes can’t be a masterpiece like Raging Bull or Taxi Driver. Every once in a while you’re going to have a Casino or a Bringing Out the Dead. Macworld 2008 was the Casino of Steve Jobs career.

Tech Dominated by M&A–not IPOs

A few days ago, I offered readers my forecast for tech IPOs in 2008. But in many ways, the real action–and most realistic exit strategy-for the lion’s share of startups is to be swallowed by some bigger fish. This point was driven home to me when I saw a recent end-of-year M&A report from America’s Growth Capital. Last year, there were 307 tech mergers or acquisitions, down 19% from 381 in 2006. That compared to 60 tech IPOs–a ratio of about 5 to 1.

The disparity in the importance of the IPO market and the M&A market really becomes clear, though, when you look at the value of the transactions. Last year, as of 12/19, there was $203 billion worth of tech M&A deals, compared to just $7 billion in capital raised through IPOs. That’s a ratio of 31 to 1!!!

Although the number of tech mergers declined, the value of those transactions soared 46%. The main reason? The explosion of huge private equity buy-outs. The number of tech deals exceeding $1 billion soared 38% last year. And four out of the top 10 largest deals were handled by private equity shops: Kohlberg Kravis Roberts acquired First Data, Silver Lake Partners bought Avaya, Madison Dearborn Partners scooped up CDW and The Blackstone Group took over Alliance Data Systems.

So what does this portend for 2008? With the private equity biz in a deep freeze, I would expect that we’ll see a significant decline in both the number of deals and the total value of transactions. That leaves good ol’ corporations as the main predators.

The prevailing business model, er, I mean, fantasy in Silicon Valley today is to be acquired by Google. But Google is not the most acquisitive tech company. Here’s the list of top 10 acquirers in 2007:

Microsoft (17)

Cisco (15)

Google (14)

Oracle (12)

EMC (12)

Hewlett Packard (11)

IBM (11)

Interactive Corps (9)

Yahoo! (6)

Nuance (4)

eBay (4)

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