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By Stephen Shankland, 21 April 2009 17:04

NEWS

Â…cloud computing, where applications run on central servers on the internet rather than in a company's own confines. Cloud computing takes many forms, but from Oracle's perspective, an excellent example is Salesforce.com, whose sizable cloud-computing service competes directly with Oracle's Siebel business for customer relationship management chores such as tracking who bought what and when their warranty is up for renewal.

But having Sun's hardware assets in-house gives Oracle more flexibility to adapt to cloud computing on its own, in particular through Sun's recently relaunched Network.com cloud computing infrastructure.

Sun chairman and co-founder Scott McNealy and even more so chief executive Jonathan Schwartz are likely to be breathing a sigh of relief.

Sun's stock plunged after IBM's attempted acquisition of Sun fell apart, but with an Oracle acquisition offer also on the table, it is now clear why Sun could play chicken with IBM then issue a statement about the board's faith in Schwartz after IBM walked.

Oracle seemed eager to justify the price, arguing it will improve Oracle's earnings per share significantly and that it will help the company more than earlier massive acquisitions.

Oracle president Safra Catz said in a statement: "We expect this acquisition to be accretive to Oracle's earnings by at least 15 cents on a non-GAAP basis in the first full year after closing. We estimate that the acquired business will contribute over $1.5bn to Oracle's non-GAAP [generally accepted accounting principles] operating profit in the first year, increasing to over $2bn in the second year. This would make the Sun acquisition more profitable in per-share contribution in the first year than we had planned for the acquisitions of BEA, PeopleSoft and Siebel combined."

It should be noted that although Oracle did surprisingly well integrating BEA Systems, PeopleSoft, and Siebel - despite having its own directly competing products in each case - but also that those were software companies. Sun is much more, and the future of its hardware business is cloudy.

Oracle can sell software-hardware package deals and build a Sun-based cloud service, but how well will it serve customers who want to run their own machines with their own software? It is likely those companies will look elsewhere, unless Oracle can show it truly wants to be a fully fledged hardware company.

It is not clear how much Oracle's financial projections rely on the strength of that standalone server business. Historically, selling software has much nicer profit margins. It is also not clear how much of a hit Oracle is expecting to its current software business after a Sun acquisition turns present allies into rivals.

Oracle also must deal with the fact that server makers HP, Dell and IBM could become less eager to promote Oracle's software. Because massive database servers are so complicated, Oracle has relied on tight sales, support and marketing partnerships, and those companies could lose enthusiasm if their server salesforce starts seeing Oracle's offering competitive bids.

At least Oracle's acquisition faces less of an antitrust hurdle than IBM's. IBM and Microsoft offer viable database competitors to Oracle's and Sun's, and Oracle buying Sun mean there would still be major server makers rather than the three left standing had an IBM acquisition gone ahead.

So Sun shareholders and government officials likely will be convinced of the merits of the deal. The ultimate success, however, will depend on how Sun and Oracle's customers see it.