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Oracle (ORCL)
Oracle Enters the Hardware Market
In a surprise turn of events, Oracle announced on Monday that it would acquire Sun Microsystems, Inc. (JAVA: Charts, News, Offers) for $7.4 billion. Sun Microsystems, Inc. was recently in the news after acquisition talks between the company and IBM (IBM: Charts, News, Offers) broke down. Investors appeared reluctant that the company would find another suitor, but their perception proved to be wrong. Why did Oracle decide to purchase the company? Is this acquisition really the best move for the company? How will this merger change the technology sector?
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Over the last two years, Oracle has been purchasing a variety of businesses with the hopes of improving their business and eliminating threats from its competitors. Sun Microsystems, Inc. is definitely one of the company's high-end acquisitions. Under the agreement, Oracle will pay $9.50 a share in cash for each share of Sun, which represents a 42% premium over Sun's closing price last Friday of $6.69 and a 90% premium over Sun's market value. Business at Sun Microsystems has been dwindling for a while due to the economic downturn and companies seeking out better deals on computer hardware. After talks between IBM and Sun Microsystems failed, Oracle saw an opportunity to swoop in and gain an edge on one of its biggest competitors. This proved to be one of the main factors that led the company to make this decision. In addition to this, the company will be able to provide its customers a better suite of products after the acquisition. Oracle's business has always been lacking in the computer hardware and middleware business. Oracle Chief Executive Larry Ellison said “Java is the single most important software we've ever acquired.”
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One of the most important elements of the deal involves the clients that Oracle will acquire as part of the merger. Sun Microsystems has an impressive list of clients in the government, telecommunications industry, and Wall Street. When the economy rebounds and these industries start thriving again, Oracle may be able to obtain record profits. Oracle has positioned itself to be one of the only companies that will be able to engineer integrated systems from applications to storage. All of these aspects seem to say that this was the best decision for the company. One problem is apparent and could possibly harm Oracle's success going forward. The deal proves to be risky because Oracle does not have any experience in the computer hardware business. This problem is easily solved by employing individuals that understand how the computer hardware business works. Hopefully, Oracle will keep some of the star players at Sun Microsystems and use their expertise during this acquisition.
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Oracle has been positioning itself to be one of the leaders in the technology sector for a while now. This deal is just one of many executed by CEO Larry Ellison to help the company create the foundation necessary to become an international technology powerhouse. Oracle is definitely turning up the heat on its competitors. Overall, the deal seems like a positive one for both parties involved. The challenge facing Oracle is to merge both companies together while maintaining the positive elements of each company. Shares of Sun jumped 35.7 percent to $9.08 in morning Nasdaq trading, while Oracle shares fell 3.7 percent to $18.36.
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