Delay in Oracle-Sun Merger Hurts

At an event in San Jose, Mr. Larry Ellison, the Chief Executive and Chairman of Oracle Corp. (ORCL - Snapshot Report), the largest software company said that its proposed acquisition of Sun Microsystems, Inc. (JAVA - Snapshot Report) for $7.4 billion ($9.50 a share) has been slowed by an ongoing antitrust review in Europe and the company is still waiting for clearance by the European Commission. The delay in approval from the regulatory body is causing Sun Micro to lose about $100 million each month.

The major issue lingers on Oracle's potential acquisition of Sun's MySQL – an open-source database software which overlaps Oracle’s own database software. This could smother competition in the database software industry. However, Mr. Ellison said the deal is expected to be cleared by European regulators, despite the delay. It still remains unclear how long the European approval would take.

While it is being speculated that Oracle may need to spin off the MySQL software business to get quick European Commission approval, Mr. Ellison said that Oracle and MySQL do not compete at all and the company has no intention of spinning off MySQL and will keep all the assets of Sun including the hardware and the data storage lines intact.

During the event, Mr. Ellison also said that in his view SAP AG (SAP - Snapshot Report) and International Business Machines (IBM - Analyst Report) are Oracle’s major competitors and hurt Sun’s business, but said that Microsoft (MSFT - Snapshot Report) does not pose a threat to the company. Moreover, Mr. Ellison expects the current economic condition to remain challenging and does not expect a real recovery in the next five years.

Sun’s performance has not been good for quite a number of quarters and has been struggling to make profit. It had reported a loss of $147.0 million in the last quarter in Aug.

Moreover, shares of Oracle were down after the company reported lower first quarter revenue and missed expectation for license revenue which fell 17% from the year-ago period. Despite cost-cutting efforts and higher gross margin, we remain concerned about the delay in closing the merger, which could erode Sun's profit, which will make it less valuable to Oracle's business.

We have a neutral rating on both Oracle and Sun Microsystems.