STLR Cheat Sheet: Oracle’s Takeover of Sun Microsystems

Oracle Corp.’s $7.4 billion acquisition of Sun Microsystems Inc. has hit the IT headlines again this week with the issue of the European Commission’s formal statement of objections, presaging an uphill battle for Oracle to secure antitrust clearance in the EU. STLR brings you this cheat sheet on the issues, explaining what’s at stake, the latest ins and outs of the deal, and the reactions of various commentators.

The players

Oracle, headquartered in Redwood Shores, California, is the world’s second-largest software vendor, and the leader in enterprise database management systems (see company history here).

Santa Clara-based Sun Microsystems is a multinational provider of “network computing infrastructure solutions,” which includes hardware, software, storage and services (see company profile here). Among its key products are the open source programming language Java, the Solaris operating system, and open source database software MySQL.

The European Commission is one of the institutional bodies of the European Union which, among many functions, evaluates a proposed merger/acquisition and its effect on the relevant competitive markets.  In the course of its ongoing review of the the Oracle acquisition of Sun, it has voiced a number of concerns and it appears that it may be inclined to block the deal.

At the time of the initial announcement, Oracle CEO Larry Ellison stated that “[t]he acquisition of Sun transforms the IT industry, combining best-in-class enterprise software and mission-critical computing systems. … Oracle will be the only company that can engineer an integrated system … where all the pieces fit and work together so customers do not have to do it themselves.”

The deal was announced in April of this year, but has yet to close as the parties await competition clearance in the EU. As Sun lingers in regulatory limbo, its competitors are reported to be closing in, seeking to persuade Sun customers to switch suppliers. Sun was recently reported to be losing $100M a month because of the uncertainty, and announced in October that it was cutting 3,000 jobs worldwide.

Antitrust issues

The main concern of the European Commission is that the acquisition may reduce competition in the market for corporate databases. The transaction would result in the world’s largest database software vendor taking over the company behind the world’s most popular open source database software. When reviewing a proposed merger or acquisition (a concentration), the EU Commission seeks to ascertain whether the concentration will significantly impede effective competition in the EU, in particular as a result of the creation or strengthening of a dominant position (see Art. 2(3) of the EC Merger Regulation (139/2004)). Reduced competition may lead to higher prices and limit the choice of goods and service available to consumers and businesses. If the Commission finds that the proposed concentration is likely to have such anticompetitive effects, it will block the transaction unless the parties agree to commitments which alleviate the Commission’s concerns, such as selling part of the combined business (divestiture) or licensing technology to other market players.

Reports suggest that the initial focus of the investigation was on the implications of Oracle’s control of Java, but subsequently shifted to MySQL.  MySQL is a hugely popular open source relational database management system, acquired by Sun in 2008, which is downloaded more than 60,000 times a day and is used to power such websites as Wikipedia, Facebook and YouTube. It appears that the European Commission is keen for divestiture of MySQL to be made a condition for the deal to proceed, but Oracle is showing little sign of being prepared to compromise. Though the Antitrust Division of the U.S. Department of Justice cleared the acquisition in August, the statements of the EU Commission to date, and its decision to pursue an in-depth investigation into the proposed concentration, indicate that it is taking a tougher stance.

Timeline: Developments thus far

  • Following a failed bid by IBM, on April 20, 2009, Sun Microsystems and Oracle announced that agreement had been reached on Oracle acquiring Sun.

  • On August 20, Oracle announced that the US Department of Justice had approved the acquisition without conditions and terminated the waiting period under the Hart-Scott-Rodino Act (during which regulatory authorities may request further information).

  • On September 3, the European Commission announced that it was opening an in-depth investigation into the proposed takeover, which would last until January 19, 2010. European Commissioner for Competition Neelie Kroes stated that “[t]he Commission has to examine very carefully the effects on competition in Europe when the world’s leading proprietary database company proposes to take over the world’s leading open source database company. In particular, the Commission has an obligation to ensure that customers would not face reduced choice or higher prices as a result of this takeover.” She further noted that “[t]he proposed transaction would bring together two major competitors in the market for databases. The database market is highly concentrated with the three main competitors of proprietary databases – Oracle, IBM and Microsoft – controlling approximately 85% of the market in terms of revenue.”

  • During a meeting on October 21 between Commissioner Neelie Kroes and Oracle President Safra Catz, Ms. Kroes expressed “her disappointment that Oracle had failed to produce, despite repeated requests, either hard evidence that there were no competition problems or a proposal for a remedy to the competition problems identified by the commission.”

  • On November 9, Sun disclosed in a regulatory filing with the SEC that European Commission had issued its formal statement of objections, which “sets out the Commission’s preliminary assessment regarding, and is limited to, the combination of Sun’s open source MySQL database product with Oracle’s enterprise database products and its potential negative effects on competition in the market for database products.” The text of the statement of objections has not been made available to the public.

  • In its statement of the same day, Oracle stated that “[t]he Commission’s Statement of Objections reveals a profound misunderstanding of both database competition and open source dynamics. It is well understood by those knowledgeable about open source software that because MySQL is open source, it cannot be controlled by anyone. That is the whole point of open source.”

  • On the same day, the US Department of Justice issued a statement responding to the news of the European Commission’s statement of objections, noting that: “[a]fter conducting a careful investigation of the proposed transaction between Oracle and Sun, the Department’s Antitrust Division concluded that the merger is unlikely to be anticompetitive.” There were many open source and proprietary database competitors safeguarding customer choice, as well as a community of developers and users of Sun’s open source database who could support a derivative version of it. The Department of Justice expressed the hope that “the parties and the EC will reach a speedy resolution that benefits consumers in the Commission’s jurisdiction.”

  • On Tuesday, November 10, Neelie Kroes was reported to have responded to Oracle’s statement, dismissing its arguments as “facile and superficial.”

Reactions and comments

  • Steve Lohr and James Kanter of the New York Times argue that Oracle’s battle with the European Commission “boils down to a conflict about the importance of free software and the government’s role in protecting it” and notes that the “sharp exchanges fit a familiar pattern in antitrust disputes between Brussels and American technology companies” such as Microsoft and Intel. They quote Prof. Michael A. Cusumano’s opinion that “[i]t makes sense that the Europeans come to the defense of open-source companies because the big proprietary companies are nearly all American” (though blogger Dennis Byron notes that the big open sources companies are all American too).

  • In a Reuters analysis piece, Jim Finkle ponders Oracle’s reasons for fighting for MySQL. He notes that MySQL’s customer base is made up of mostly small- and medium-sized companies who use it to run websites and store business data, whereas Oracle has traditionally focused on larger corporations. MySQL is available for free, but Sun has generated revenue by charging for enhanced versions. Acquiring MySQL would enable Oracle to offer a “one-stop-shop for data customers”, with MySQL competing with Microsoft’s SQL Server at the low end of the market, while Oracle’s existing products would continue to compete in the mid-to-high range.

  • The Economist opines that few observers believe that MySQL and Oracle really compete, though there are merits to the argument that Oracle would acquire control over commercial use of MySQL. Though MySQL is available for free, the open source license requires any code built around the product to also be made open source. For this reason, most firms prefer to obtain a commercial license which does not impose this obligation. After the acquisition, the licensor would be Oracle. This “dual-licensing” may help prevent the emergence of a strong alternative to MySQL.

  • Steven Davidoff, the NYT’s Deal Professor, believes that Sun should have pushed the negotiation on regulatory covenants much harder: the relevant clause in the acquisition agreement clause amounts to a “flat-out bar on Sun being able to force Oracle to dispose of, or run differently, MySQL or any other asset that might offend the European Union antitrust authority.” Furthermore, Oracle is under no obligation to complete the transaction if EU antitrust approval is not granted.

  • In October, free software activist Richard Stallman was reported to have addressed a letter to Neelie Kroes urging the Commission to demand the divestment of MySQL in return for approval of the acquisition, stating that the acquisition “will predictably limit the development of the functionality and performance of the MySQL software platform, leading to profound harm to those who use MySQL software to power applications.”  He was unconvinced by Oracle’s contention that if it did not act as a good host for MySQL, the software could easily be “forked” to create a new platform, because MySQL is  provided subject to the open source GNU General Public License (GPL). Stallman countered that the current migration from version 2 of the GPL to version 3 raised a number of “fundamental and unavoidable legal obstacles” to combining code under the different versions to achieve this “forking”.

Oracle’s acquisition of Sun Microsystems raises important issues regarding the different approaches to antitrust on either side of the Atlantic, in particular in the IT sector, and regarding the future of open source software. All of the indicators point to a tough battle ahead for Oracle.

As Oracle fights to consummate its deal, follow us for updates.

By Brian Harley and Jane Wu

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