Sun’s Sparc still has future, Ellison insists

Contact: John Abbott

With Oracle likely just two months or so away from closing its $7.4bn acquisition of Sun Microsystems, speculation is now picking up about what parts of Sun’s technology portfolio will be dropped. (And make no mistake, cost-cutting is a major driver of this deal. Oracle has pledged to wring at least $1.5bn of operating profit from Sun in the first year that it owns the company.) But Oracle is currently working hard to counter suggestions that it won’t take on Sun’s core hardware business, and in particular, that it will give up on Sparc processor development. That’s not the case, CEO Larry Ellison insists. In fact, Oracle will increase investment in Sparc, Ellison says.

His argument is that, by designing hardware and software together to work as a system, it’s possible to avoid the low-margin trap of the commodity server business. Sparc is a key part of that, says Ellison. He adds that, as IBM has found, some system features are best done in silicon. That said, Oracle doesn’t plan to work on a Sparc-Solaris version of its Exadata database machine. Instead, it will keep the arrangements it has with Hewlett-Packard in place over its current systems activities for the Exadata database machine, which Ellison claims has been the most successful product introduction in Oracle’s 30-year history.

However, it’s still hard to believe that Oracle will make a long-term commitment to the continuing development of a proprietary RISC chip architecture. IBM’s Power and Intel’s Itanium are now the only other significant architectures: Power has been bolstered by some lucrative and high-volume gaming console contracts, while Itanium sales, driven almost exclusively by HP, have done little more than replace shipments of older HP architectures (such as Alpha, PA-RISC and NonStop) without any significant market growth. So how does Ellison see his way out of this? He plans to work in partnership with Fujitsu to add features to Sparc aimed at improving Oracle’s database performance. But reading between the lines, it’s possible that this could lead to handing over most or all of the ongoing development work for Sparc chips to Fujitsu. Provided, of course, the Japanese tech giant wants to take that on.

IBM-Sun: Nothing but March madness?

Contact: Brenon Daly

Maybe the speculation around IBM buying Sun Microsystems was nothing more than a bit of March Madness. When reports surfaced last month that a deal could be in the works, Sun’s long-ailing shares soared from about $5 to nearly $9 in a single session. (At the time, we also looked at what a potential pairing of the tech giants might mean.) And it wasn’t just sporadic trading that powered the mid-March move. More than 160 million Sun shares traded the day after The Wall Street Journal carried its report on initial talks, meaning volume was eight times heavier than average.

It turns out that anybody who bought the stock from then until last Friday is now underwater. (Or to continue our NCAA basketball terminology, they’ve had their bracket busted.) Both the WSJ and The New York Times reported Monday that a deal – even at a lowered price – may be off the table. Sun shares gave up one-quarter of their value in Monday afternoon trading, falling to about $6.50 each. Volume was again several times heavier than average.

Amid all these reports of tough negotiating and ‘recalibrated’ deal terms, we’re reminded of the five-month saga of one public company buying another public company last year. In mid-July, Brocade Communications unveiled a $3bn offer for Foundry Networks, paying nearly all of that in cash and only a tiny slice in equity. As the equity markets plunged last October, the two sides agreed to lower the deal value to $2.6bn by trimming the cash price and removing the equity component. (Brocade shares had been cut in half during the time from the announcement to the readjustment.)

Now, the combined Brocade-Foundry entity, which has existed since mid-December, has a total market capitalization of just $1.5bn. In fact, my colleague Simon Robinson recently speculated that Brocade may be attracting interest from suitors. One of the names that has popped up? IBM, which would get an instant presence in the networking market. And if Big Blue is done with Sun (as reports suggest), then perhaps the company will just shift its M&A focus.

Semi trouble

-Contact Thomas Rasmussen, Greg Quick

There are bargains aplenty in the semiconductor sector. From Integrated Device Technology’s $20m tuck-in of Silicon Optix last month to Sun Microsystems’ takeover last April of Montalvo Systems for an estimated $25m, we’ve seen a flurry of lowball purchases of semiconductor startups over the past year. The reason? These companies tend to have a high burn rate, without much revenue to offset that. (For instance, we estimate that Silicon Optix generated just $4m in sales in the year leading up to its acquisition, while Montalvo was still a pre-revenue company.)

Of course, the semiconductor industry has been slumping for several years, with a sharp decline in valuations. While the number of deals has been tracking steadily at around 180 per year recently (147 so far this year), the amount spent on deals – a far more important figure – is down almost 40% from last year, and close to 80% from 2006. Things are not getting any better, either, at least according to our recent Tech Banking Outlook Survey. Bankers rated the semiconductor industry the lowest in terms of anticipated M&A spending for next year.

This dour outlook is likely to have an extremely negative impact on the semiconductor startups still out there trying to make it. And there are a lot of companies, backed by a lot of venture capital, trying to crack into markets that have taken much longer to materialize than ever imagined. For example, in the promising category of 10Gbase-T physical layer technology, we wonder about the outlook for Teranetics and Solarflare Communications. Also, we recently wrote about the troubles in the highly crowded and fragmented 10-Gigabit Ethernet controller space. Although Intel, Broadcom and the overall market are starting to show signs of life, the situation for the many startups in the sector is not looking any better. In fact, we heard recently that Neterion’s president might have thrown in the towel and that the company could be on the block. Having wagered in the vicinity of $100m, investors will undoubtedly take a bath on this one.

SAP’s next big deal?

Earlier this week, SAP marked the first anniversary of its largest deal ever, the $6.8bn purchase of Business Objects. Now, some folks in the market are already lining up the next multibillion-dollar acquisition for the German giant. JMP Securities analyst Pat Walravens has floated the idea that SAP may be planning to buy data-warehouse titan Teradata. (Incidentally, Teradata celebrated its own first anniversary this week, having started trading on the NYSE on October 9, 2007.)

The pairing would make a fair amount of sense. We noted a year ago that SAP and Teradata have a deep partnership, sharing more than 200 customers. And SAP clearly needs more technological heft if it wants to sell a stand-alone data warehouse. (It currently offers its data warehouse as part of the NetWeaver BI integration stack.) But we have a hard time seeing SAP reaching for Teradata, which sports a $2.9bn market capitalization.

Typically, SAP doesn’t make consolidation plays like Teradata. (That’s the role of Oracle, which is likely to be less interested in Teradata since recently rolling out its high-end data-warehouse offering, HP Oracle Database Machine, which is its answer to the massively parallel-based warehouses offered by Teradata and others.) Instead, SAP generally favors small technology purchases, and one startup that we think would fit SAP pretty well is Greenplum. SAP thought well enough of Greenplum to put some money into its series C earlier this year.

However, SAP might find itself in competition for Greenplum with the startup’s other strategic investor, Sun. Greenplum has a data warehouse appliance for Sun servers. There’s also the alumni connection: Greenplum CEO Bill Cook worked for 19 years at Sun before running the startup. That said, Greenplum is not the only data-warehouse vendor Sun has invested in, having taken a minority investment in Infobright’s series C last month.