Today's announcement that Oracle (ORCL) would acquire Sun Microsystems (JAVA) for $7.4 billion in cash left me scratching my head. The rationale? Something to do with what Oracle's president calls "non-GAAP earnings." As if that's supposed to explain Oracle's first acquisition of a hardware company.
I'm not sure what non-GAAP earnings are, but it sounds like a special kind of accounting whipped up to justify a deal that would not look good according to Generally Accepted Accounting Principles. Safra Catz, Oracle's president, estimates that on a non-GAAP basis, the deal will add $1.5 billion in "non-GAAP operating profit" in the first year and $2 billion to this new measure in future years.
One thing seems clear. This $9.50 a share deal values Sun at 36 percent above its Friday closing price. And the deal is unlikely to encounter the kind of anti-trust scrutiny that a deal with International Business Machines (IBM) -- at the same price -- would surely have met due to their overlapping server businesses. Such an IBM-Sun marriage would have yielded 65 percent of the high-end Unix server market and a dominant share of the tape storage market.
So this deal is a clear win for Sun. But will these "non-GAAP" earnings really help Oracle earn back the premium it paid for Sun? After all, Oracle currently sells its software on servers from Sun's rivals -- how will Oracle decide whether to maintain those partnerships for the benefit of its software or sell Oracle software only on Sun servers for the benefit of its new hardware business?
Update. A colleague emailed to suggest a clear rationale for this merger -- it helps Oracle take out a competitor. In 2008 Sun spent $1 billion to acquire MySQL, a database used by many social networks like Facebook, which competes with Oracle's database software. A few years ago, Oracle bought InnoDB (a database engine product from Innobase, a Helsinki, Finland-based company) which many companies use in conjunction with MySQL. Perhaps, this deal requires more antitrust scrutiny than I initially thought.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.