Oracle and EC Positions Harden in Wake of Statement of Objections

Now that the European Commission (EC) has issued a formal statement of objections to Oracle’s proposed acquisition of Sun Microsystems for $7.4 billion, misdirected debates will ensue on multiple fronts.

We could argue all day about what ought to happen, what should happen, but it doesn’t matter. What we think is irrelevant to this process and to the ultimate disposition of Oracle’s bid for Sun.

What matters now are two things: the adamancy of the EC’s opposition to Oracle’s Sun acquisition, which turns on competitive concerns about the former’s ownership of MySQL in the database market; and how Oracle responds to that opposition.

Given the unusually prompt and surprisingly vituperative counterattack that an EC official delivered in the wake of Oracle’s disdainful reply to the European regulatory body’s statement of objections, I don’t think we should count on the EC to suddenly back down after seeing the sweet light of reason in Oracle’s argumentation.

So far, we are not seeing the two sides angle toward a compromise or reconciliation. If anything, they’re heading in the other direction, hardening their respective positions and digging in for a protracted battle.

Initially, when Oracle first announced its bid for Sun, we didn’t see much discussion of MySQL as a deal consideration. Some analysts had estimated that MySQL accounted for about $300 million in revenue in its last fiscal year. That might not seem like a huge amount, but remember that MySQL is doing well in database-management markets that are growing fast – those in developing countries such as China, India, Southeast Asia, Eastern Europe, and Latin America.

Bear in mind, too, that Oracle isn’t a major player in those markets. Its flagship database software is too expensive to compete in cost-sensitive markets where many businesses are at earlier stages of development than their counterparts in mature economies. In that context, one can see that Oracle views MySQL as a ticket to growth in a world where growth has become harder to attain. What’s more, MySQL gives Oracle a competitive entry in those high-growth markets against its longtime nemesis Microsoft and that vendor’s Microsoft SQL Server.

Does Oracle want to give up MySQL and leave behind an opportunity to gain share, revenue, and profitability in growth markets where it currently isn’t prospering against its longtime adversary? In a word, no.

Oracle wants MySQL. It doesn’t view the open-source database as incidental to its acquisition of Sun. Instead, Oracle sees MySQL as an essential asset, one it very much wants to own.

Look at it this way: Anything Oracle would cobble together with Sun’s hardware and other software for a data-center convergence battle against IBM, HP, and Cisco would confront prolonged, stiff competition in a war of attrition for consolidation spoils in mature data centers. That’s a war with waging, yes, but it’s one Oracle isn’t certain to win, and Larry Ellison and his team know it.

Meanwhile, MySQL represents an attractive, high-probability hedge against the more speculative data-center initiative. Unlike Sun in the data center, MySQL is on the ascent in the developing world’s database-management markets. It’s number one or two already in some key high-growth jurisdictions, and Oracle – with its ample resources and prodigious sales machine – could drive even greater returns. MySQL’s market opportunity isn’t as big as the one associated with the data-center push, but it’s probability of return is higher. Oracle knows it, too.

So, Oracle won’t let go, and the European Commission is spoiling for a fight. I’m not sure why Oracle went into street-fighting mode, but its truculent stance seems unlikely to persuade the EC to reconsider its position. Increasingly, it seems the EC will only be appeased if Sun consents to divest MySQL before or concurrent with the Sun acquisition.

What’s likely to happen now is that Oracle basically will object to the statement of objections. With no softening or surrender likely in the positions or the EC and Oracle, the current impasse is likely to lead to a formal rejection of the deal by the EC. According to a piece in the Wall Street Journal, here’s how that process would look:

The European Commission is due to make a final ruling on the deal by Jan. 19. Oracle could appeal if the EU ends up blocking the acquisition. In that event, the case would head to trial, and the process could drag on for months or even years, said Bert Foer, president of the American Antitrust Institute, a nonprofit group that isn’t affiliated with the case.

All the while, Sun’s asset value will depreciate. Oracle already says Sun is losing approximately $100 million per month as this acquisition’s approval is delayed.

Would Oracle just pull the plug and walk away, invoking a $260-million breakup fee? The consensus is that Oracle isn’t leaning in that direction. That, in and of itself, tells you how much Oracle wants this deal to go through, and it also tells you that MySQL is a significant element in Oracle’s grand design.

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