Oracle to fight European regulators for Sun unit, analysts still hold faith acquisition closes

By Cristal Cody

Tupelo, Miss., Nov. 10 - American investors were not too concerned with the European Commission's preliminary stance against Oracle Corp.'s $7.4 billion acquisition of Sun Microsystems, Inc., several analysts said Tuesday.

Sun shares closed at $8.15, down 9 cents, or 1.09%, on Tuesday.

Meanwhile on Wall Street, the rally in equities from a day earlier slipped on Tuesday.

The Dow Jones Industrial Average edged up 20.03 points, or 0.20%, to close at 10,246.97.

The Standard & Poor's 500 index fell 0.07 of a point, or 0.01%, to 1,093.01, and the Nasdaq Composite index closed down 2.98 points, or 0.14%, at 2,151.08.

Oracle ready for overseas battle

Redwood Shores, Calif.-based Sun disclosed in a regulatory filing late Monday that the European Commission has objected to the company's $9.50-a-share cash takeover by Santa Clara, Calif.-based software maker Oracle in a "statement of objections."

The commission's final decision is due by Jan. 19.

European regulators are concerned that Oracle's acquisition of Sun's MySQL open-source database could hurt competition in the database market if Oracle does not license the product to companies in favor of its own software.

Sun's MySQL database is used to run web sites for companies that include Google Inc. and Amazon.com Inc.

Sun paid $1 billion for MySQL in 2008, and it brings in about $150 million in annual revenue.

The U.S. Department of Justice approved the deal in August and reiterated the stance in a statement on Monday.

Oracle, meanwhile, said in a statement that it plans to fight against the commission's objections.

Peter Goldmacher, an analyst with Cowen and Co., told Prospect News in an interview on Tuesday that MySQL is a viable product and an important part of the open-source database community for small companies.

"And it's a product that Oracle can sell into markets it's not historically sold into," he said. "So there's not only the opportunity to sell in the U.S. and compete against Microsoft [Corp.], which would probably be very popular, but also in the BRIC countries (Brazil, Russia, India, China). I'm sure that's why Oracle wants it. They bought it, and I think they should get it."

Goldmacher said that Oracle's strong stance to fight the commission has kept up investors' confidence in the acquisition.

"Oracle has never been known to be contrite or humble in these kinds of things," he said. "If they were, it would go a long way, but they're trying to make a point. We're talking about a $150 million business, it just doesn't matter."

European appeal unlikely

If the European Commission ultimately rejects Sun's takeover, Oracle can appeal to the European Court of First Instance.

However, Oracle is unlikely to extend the process with an appeal because of the pressure that has been put on Sun's sales, David Hilal, an analyst with FBR Capital Markets Corp., said Tuesday in a research note released to Prospect News.

Oracle recently reported that Sun lost $120 million in the quarter ended Sept. 27 from market loss to rivals International Business Machines Corp. and Hewlett-Packard Co.

Instead, Oracle likely has a strong argument that healthy competition remains in the sector, Hilal said.

"Oracle believes the database market is intensely competitive with at least eight strong players - Oracle, IBM, Microsoft, Sybase [Inc.] and three open-source vendors, MySQL, Ingreså and PostgreSQL - and that there is no basis in European law for objecting to a merger of two among eight firms selling differentiated products," Hilal said.

Oracle is not expected to agree to divest MySQL since it intends to oppose the commission's statement of objections, he said.

"We think Oracle could make some concessions or agree to some remedies that guarantees it will maintain an open-source database option for customers," Hilal said. "We continue to believe that it is more likely that Oracle's acquisition of Sun goes through."

Keeping cash inside borders

Brent Williams, an analyst with the Benchmark Co., told Prospect News that the loss of European funds also could be a factor the commission has considered in its deal investigation.

"Half of every dollar they charge comes back to the U.S. and leaves Europe," Williams said of Oracle.

"These software companies are disproportionately siphoning capital investment money off to the U.S.," he said. "So the Europeans figure that if they can encourage open source for a variety of reasons, the prices will be lower and of the dollars actually spent, a good chunk of that will stay in Europe."

Oracle shares lost 3 cents, or 0.14%, to close at $21.80.

In other stocks, shares of IBM added 91 cents, or 0.72%, to finish at $126.91.

Hewlett-Packard's stock slid 3 cents, or 0.06%, to $49.96.

Shares of Google closed up $4.25, or 0.76%, at $566.76, and Amazon.com shares added $3.48, or 2.75%, to close at $130.15.

Microsoft's stock rose 2 cents, or 0.07%, to $29.01, while Sybase shares fell 40 cents or 0.98%, to $40.46.

Mentioned in this article:

Amazon.com Inc. Nasdaq: AMZN

Google Inc. Nasdaq: GOOG

Hewlett-Packard Co. NYSE: HPQ

International Business Machines Corp. NYSE: IBM

Microsoft Corp. Nasdaq: MSFT

Oracle Corp. Nasdaq: ORCL

Sun Microsystems, Inc. Nasdaq: JAVA

Sybase, Inc. NYSE: SY

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