John Paczkowski

Recent Posts by John Paczkowski

What Was It Oracle Wants With Sun, Again? Redux.

javaOracle’s pending acquisition of Sun will undoubtedly be the subject of much discussion this afternoon when the database behemoth reports fiscal first-quarter earnings after the market close. Indeed, there’s quite a bit of jawing about it already, particularly about Oracle’s continued commitment to the deal in light of the ugly decline in Sun’s revenue and profitability since it was announced in April.

In a research note issued this morning, Bernstein analyst Toni Sacconaghi wondered whether Oracle (ORCL) might even consider walking away from the deal, though he ultimately concluded that it was unlikely.

“Given ORCL’s repeated and strident commentary, it appears very unlikely that it will walk away from the deal, although it would not face a break-up fee if it did (unlike Sun, which faces a $260+ million break-up fee),” he wrote. “We continue to believe that the JAVA-ORCL deal is very likely to close, but it will be interesting to see if Oracle’s conviction level waivers at all on its earnings call today.”

Indeed. Certainly, there are plenty of reasons to think that it might. For one thing, notes Sacconaghi, Sun’s (JAVA) recent financials are going to make it difficult for for Oracle to hit its promised $1.5 billion in first-year accretion profits.

“Our forecast now calls for [Sun] to be barely break even on a non-GAAP basis next year,” Sacconaghi says, adding that earnings are likely to be nearly $900 million less than he modeled when the deal was first announced. “Accordingly, assuming no material revenue synergies, our analysis suggests that in order to hit its $1.5B accretion target, Oracle may need to reduce Sun’s workforce by 15,000, which represents over 50 percent of Sun’s current headcount and appears implausible.”

So Oracle could hit its aggressive Year One accretion targets. It would just have to gut Sun to do it.

One last point worth noting here. Sacconaghi seems confident the European Union will ultimately approve Oracle’s acquisition of Sun, though possibly with conditions around mySQL. But he thinks approval will take time. And the longer it takes, the worse it will be for Sun, whose business is already suffering from the uncertainty surrounding it.

“…The EU took an average of 140 days between the time that a Phase II [review] was announced and a merger was ultimately approved,” he explains. “Given that Phase II for the JAVA deal was announced on September 3rd, this implies a January date for resolution, and would require JAVA to go through another two full quarters as a standalone company. With uncertainty around the ORCL deal already weighing on JAVA, this suggests the potential for further erosion in Sun’s financials.”


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