Oracle announced a $7.4 billion deal for Sun Microsystems just a few weeks after the IBM deal for Sun fell through. Oracle now controls a significant open-source alternative and a nice piece of the high-end computing business.

These open-source components had been viewed as the alternative to the dominance of the Big 4 (or “MISO” — Microsoft, IBM, SAP, and Oracle). In addition, Oracle gains an innovation engine with the assets of Sun’s Labs groups, which pioneered a series of advances that include potential enterprise solutions for the virtual world.

The deal continues Oracle’s path to acquiring deeper components of the enterprise-computing stack, including appliances. Here’s how the addition of Sun expands the stack:

• Middleware — While Java and Solaris may appear to be the crown jewels in the deal, Oracle has managed to slowly buy out other stack competitors (i.e. BEA and now Sun) and integrate them into the Fusion Middleware suite of tools for custom development and its own Fusion Applications product lines. Sun complements BEA. In addition, the open-source stack will also provide Oracle with a new avenue to the reach the small-and-midsize business (SMB) market.
• Database — Oracle takes out the low-cost competitor to SQL server on the low end and gets a shot at converting them to Oracle DB instead of IBM. Adding Sun’s MySQL expands an SMB entry point as well as the removal of a competitor.
• Hardware — Oracle gains another great recurring revenue (maintenance) base with Sun’s Solaris. This complements Oracle’s large and profitable existing database installations on Solaris that would have fallen prey to the IBM DB2 team. While there’s some talk about Oracle selling the hardware side — see this eWEEK article — this seems unlikely as Oracle focuses in on the appliance market. Even more important is the fact that Oracle can take Sun’s tools and create a purpose-built appliance running its database, middleware, and applications.

The bottom line: Oracle succeeds at post-merger integration where others often fail.

Despite skepticism, Oracle has made these acquisitions work from a financial perspective, with year-over-year quarterly profit growth that has generally been well above 20 percent. Some key success factors include:

• Acquiring companies for the recurring revenue. Oracle’s first set of deals (i.e., PeopleSoft and Siebel Systems) focused on installed-base acquisitions that provided a strong foundation of support-and-maintenance customers. This base of recurring revenues provided Oracle with the room to continue strong research-and-development investment while reducing overall costs. With this deal, Oracle gains another highly profitable maintenance base, adding pressure to competitors. This acquisition delivers Sun’s profitable Solaris revenue stream while enabling Oracle to move into a maintenance business for open-source software.
• Eating its own dog food. In the late 1990s, Oracle made a major commitment to re-engineering its back-office processes using its own applications. As a result, Oracle has become highly efficient, with a ratio of general and administrative expenses to revenues of 3 percent to 4 percent — in most calendar quarters, one percentage point lower than SAP’s and even lower than other large software vendors such as Microsoft and Symantec. Expect Oracle to put the Sun assets into its arsenal of tools for delivering software innovation.
• Mastering post-merger integration. With two former investment bankers at the helm, Oracle has one of the best post-merger integration teams in the business. Oracle’s profit performance signals that it has been able to add new companies — and those companies’ streams of revenues — while keeping costs down. Sun will provide considerable synergies in both the short and long run.

Related Coverage:

• 20090420 CNBC – Squawk Box with Karen Tso & Maura Fogarty “VIDEO -Oracle Snatches Sun, Foils IBM’s Bid“
• 20090420 The Associated Press – Jordan Robertson and Michael Liedtke “After IBM dalliance, Sun goes to Oracle for $7.4B“
• 20090420 USA TODAY – Jon Swartz and Leslie Cauley “Oracle to buy Sun for $7.4B after IBM drops bid“
• 20090420 SearchOracle.com/TechTarget – Ed Scannell “Will Sun help Oracle eclipse IBM?“
• 20090420 DestinationCRM – Lauren McKay “Oracle Takes a Shine to Sun Microsystems“
• 20090420 Managing Automation – Emily-Sue Sloane “Oracle to Spend $7.4B to Buy Sun Microsystems“
• 20090420 The Guardian – Andrew Clark “Oracle’s takeover of Sun Microsystems comes as surprise to software industry“
• 20090420 Computer Zeitung – Hans-Thomas Hengl “Mit der Kontrolle über Java sitzt Oracle am Schalthebel des Softwaremarkts“
• 20090420 Internet News – Alex Goldman “Oracle Buys Sun in IBM’s Wake“
• 20090420 Infoworld – Tom Sullivan “Can Oracle make sense of Sun’s hardware?“
• 20090420 eWeek – Nicholas Kolakowski “Oracle, Sun Deal Strengthens Competition Against IBM, HP, Cisco“

Your Point of View
What do you think about the acquisition of Sun? Did you count on Sun as your open-source stack alternative to the Big 4? You can leave public comments on this post, or send a private email to rwang0 at gmail dot com. Comments are preferred! Thanks, and looking forward to your POV!

R “Ray” Wang is an analyst at Forrester Research. His personal blog, A Software Insider’s Point of View, can be found here: http://blog.softwareinsider.org. This post first appeared on his site and appears here with his permission.