Software November 8, 2009, 9:26PM EST

Oracle's Sun Deal: Oracle May Need to Loosen Its Grip

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Oracle has a commanding lead in the market for database software, which stores the information that underlies business applications and Web sites. Oracle held 49% of the $18.8 billion worldwide database market in 2008, according to market researcher Gartner (IT), compared with 22% for IBM (IBM) and 16.6% for Microsoft (MSFT). MySQL accounted for 0.5% of database sales, Gartner says. MySQL also accounts for a small portion of Sun's revenues. For its 2009 fiscal year ended June 30, MySQL and Sun's middleware generated $313 million in sales, of a total $11.44 billion.

A Vehicle to Sell to Web Companies

Immediate revenue isn't the primary importance of MySQL to Oracle. The database gives Oracle a vehicle to sell to Web companies that don't use its powerful and more expensive 11g database. Sun estimates there are more than 12 million copies of MySQL in use. "There's not a huge amount of financial value tied up in MySQL for a company of Oracle's size," says Bill Whyman, head of technology research at investment company ISI Group. "The advantage is more strategic."

European regulators are concerned because if Oracle buys Sun, the largest supplier of database software would be acquiring the leading open-source database.

The European Union first raised concern about the Sun deal Sept. 3, saying it wanted to make sure Oracle was committed to developing MySQL. European Competition Commissioner Neelie Kroes met with Oracle President Safra Catz in October.

Java Is Key to Fusion

Industry executives say the EU has also been asking for commentary on the effect of Oracle's potential ownership of the Java programming language, though the EU hasn't specifically cited the technology in public statements. Java is a key part of a new line of Oracle business applications called Fusion, the first of which are expected next year.

For example, Oracle rival SAP (SAP) has been asking Sun and Oracle for direction on the future of Java, which it uses to build its products. Neither company has responsed, says SAP spokesman Herbert Heitmann. "There's growing concern in the [technical] community about Java," he says. "You don't get responses these days from Sun."

European opposition to the deal is the main stumbling block for Oracle, which has spent $30 billion to acquire nearly 60 companies in the past five years. The U.S. Justice Dept. has already approved the deal.

The European Commission has until Jan. 19 to make a final decision whether to allow the deal or block it.

IBM, HP Swiping Customers

The delay, however, is sapping Sun's value. Sales for Sun's fiscal first quarter ended Sept. 27 fell 25% to $2.24 billion, according to a report released Nov. 6. Sun shares the same day closed down 13¢, or 1.6%, at 8.10, vs. the $9.50 per share Oracle offered for the company in April. Sun is losing $100 million a month amid the delay, Oracle Chief Executive Larry Ellison said in September. IBM and Hewlett-Packard (HPQ) are also swiping its customers. On Oct. 20, Sun said it plans to lay off 3,000 workers in the next year, about 10% of its workforce, citing the delay in closing the acquisition, which was supposed to happen in the summer. "The longer this takes, the more money Sun is going to lose," Ellison said at the time, insisting he wouldn't spin off MySQL.

This isn't the first time the EU has tried to block a merger of U.S. companies. In 2001, it scuttled General Electric's (GE) proposed $42 billion acquisition of Honeywell (HON), ruling that the companies' combination would hinder competition in the aircraft industry.

Ellison has prevailed over trustbusters before, and is tenacious when he wants to close a deal. In 2005, Oracle bought business software maker PeopleSoft after a protracted fight with the Justice Dept. In 2008, it snared BEA Systems after BEA shareholders pushed for a higher price. "Oracle's a pretty tough competitor and they beat the DOJ in PeopleSoft," says ISI Group's Whyman. "The difference is Sun's losing a lot of money. Time usually plays to the regulators' advantage."

Ricadela is a writer for BusinessWeek in Silicon Valley.