The Wall Street Journal-20080117-Will Silicon Valley Deals Kick Into Overdrive-
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Will Silicon Valley Deals Kick Into Overdrive?
Acquisitions by Silicon Valley software giants Oracle Corp. and Sun Microsystems Inc. suggested a slowing economy and other forces could kick a recent wave of high-tech deals into higher gear.
Oracle succeeded yesterday in forging an $8.5 billion deal to acquire rival BEA Systems Inc., a maker of programs known as middleware that had resisted an unsolicited bid from Oracle in October. The $19.38-per-share price is about 14% higher than Oracle originally offered, but below the $21 figure that BEA sought. Investor Carl Icahn says he urged Oracle to raise its bid and then lobbied BEA to take the sweetened bid.
Sun, meanwhile, continued to expand beyond computer hardware with a $1 billion deal to buy MySQL AB, a Swedish start-up that sells database software based on a programming concept known as open source.
Both deals come amid increasing fears that a slowing U.S. economy could damp global spending by businesses on technology, adding to the financial pressures on small vendors trying to remain independent. At the same time, large companies are moving to grab stronger positions in one of the areas likely to remain hot -- software that helps companies build Web-based software and services. Both BEA and MySQL play an important role in that process: Corporate customers typically use BEA's technology to build business software that uses the Web, while companies such as Google Inc. and Facebook Inc. use MySQL to help run their Web sites.
"We have seen no cessation of interest in the Internet among consumers and businesses looking for cost reductions and looking for efficiency," says Jonathan Schwartz, Sun's chief executive officer.
BEA, of San Jose, Calif., is known for products that include application servers, a layer of software that serves as a foundation when companies build Web-based software. Its products share some underlying technology with competing offerings by International Business Machines Corp. IBM is No. 1 in the middleware market, with 31.8% of 2006 sales, estimates market-researcher Gartner Inc., compared to 10.5% for No. 2 BEA. Database software, which acts as a filing cabinet for information, also is frequently incorporated into programs that businesses use to run their operations. Oracle, of Redwood Shores, Calif., accounted for 40.5% of the database market in 2006, Gartner estimates, compared with less than 1% for MySQL and other open-source databases.
The products offered by BEA and MySQL appeal to companies choosing to build Internet applications and services from open-source programs or other building blocks that are free -- or at least inexpensive -- and don't lock them into a single vendor. For example, customers can now easily move programs they have written for BEA's application server to IBM's technology, and vice versa, says Yefim Natis, a Gartner vice president who also holds the title of distinguished analyst.
At the same time, many customers are willing to pay support fees to large suppliers that can provide the expertise they need to help stitch together those software components and fix anything that breaks. Oracle and Sun -- both large companies that have long supplied products for running heavy-duty computing jobs -- plan to exploit the situation by positioning themselves as more credible technology partners for customers that are thinking of betting on software from BEA or MySQL.
Oracle Chief Executive Larry Ellison, who helped touch off the consolidation wave with a hostile offer for PeopleSoft Inc. four years ago, noted that the BEA purchase expands his company's already formidable arsenal of software products. "For Oracle, this deal is a very big step toward completing our vision of becoming a strategic enterprise software vendor of choice," he said during a conference call with analysts.
The pressures -- and advantages of joining a bigger entity -- proved irresistible for BEA and MySQL, whose leaders had both been vocal about their intent to remain independent.
BEA, under Chief Executive Alfred Chuang, has been fending off casual overtures from Oracle for more than three years. In an August interview, he expressed confidence that BEA could grow independently, though investors such as Mr. Icahn urged a sale of the company.
In October, after BEA rejected Oracle's $17-a-share offer, the companies continued to discuss possible combinations, according to people familiar with the matter. In the end, Mr. Chuang says he and BEA's board "unanimously" approved the sweetened offer, which represents a 24% premium over the closing price of BEA shares Tuesday and is worth $7.2 billion after deducting $1.27 billion of cash from BEA's books.
"As Larry talked about, our two businesses are a natural strategic fit," he added during the joint call with analysts.
In recent weeks, Oracle executives spoke several times with Mr. Icahn, BEA's biggest shareholder, about the deal, Mr. Icahn says. "I wouldn't back it unless the price was right," he says.
Mr. Icahn also says he helped persuade BEA to accept a price he liked, and stayed in close touch with both companies as they negotiated the deal in the past few weeks. "It was an interesting chess game," he says. "You don't have to be a genius to know that they weren't that friendly at the beginning, but in the end, everybody worked together well."
MySQL, meanwhile, was planning to go public as early as this year, according to people familiar with the matter. Its chief executive, Marten Mickos, said in previous interviews that "we will be part of a larger company, but it will be called MySQL."
But the prospects for building successful businesses from open- source software are less clear, despite the programs' traction among customers. Companies often opt for free versions of the products.
People familiar with MySQL's finances say the company had less than $100 million in revenue in 2007 and wasn't profitable. In an interview, Mr. Mickos seems to have changed his view on independence: "I see this as an IPO, only better," Mr. Mickos said of the Sun acquisition.
Two other promising open-source start-ups last year also took offers to join larger companies. Yahoo Inc. acquired open-source messaging vendor Zimbra for $350 million and software maker Citrix Systems Inc. bought open-source virtualization firm XenSource for $500 million.
Sun, of Santa Clara, Calif., gets most of its revenue from selling server systems. But the company is also known for software, including its Solaris operating system and technology known as Java that is included in application servers and other products. Buying MySQL will make Sun more of a competitor to Oracle, a partner whose databases have long helped sell Sun hardware. But the deal also fills an important gap in Sun's software portfolio, appealing to many companies that prefer an open-source database for new projects, says Frank Gillett, analyst with Forrester Research. The deal is Sun's biggest purchase since its 2005 purchase of Storage Technology Corp. for $4.1 billion.
Besides announcing the purchase, Sun announced that it expects to report second-quarter net income of 28 cents to 32 cents a share, about double the 15 cents per share reported a year earlier. It predicted revenue would rise 1% to about $3.6 billion over the same period. Analysts, on average, had expected earnings of 29 cents a share on revenue of $3.58 billion, according to Thomson Financial.
Sun's shares were up 55 cents or 3.7% to $15.53 in 4 p.m. composite trading on the Nasdaq stock market. BEA's stock jumped $2.88 or 18.5% to $18.46. Oracle's shares rose 61 cents or 2.9% to $21.92.
