Sun May Help Oracle Grow in New Direction

Updated from 3:59 p.m. EDT

Despite the undoubted challenges, Oracle's ( ORCL) reported plan to keep Sun's ( JAVA) hardware business could spell good news for investors.

Brimming with servers and storage, Sun seemed a strange target for the database software company when the $7.4 billion acquisition was announced last month. Software technologies such as Java, Solaris and MySQL were seen as the jewels in Sun's crown, with hardware a potential distraction from Oracle's core business. Still, there could be method in Ellison's madness.

The Oracle CEO recently told Reuters that post-acquisition, his firm has no plans to exit the hardware market.

"I thought, like a lot of people, that they would jettison the Sun hardware business," said Karl Whitelock, senior consulting analyst at tech research firm Stratecast. "But, on second thoughts, trying to figure it out makes sense."

The analyst told TheStreet.com that Sun's different server and storage lines have pushed the firm into a range of markets. Although Sun has earned a reputation for poor execution during recent years, it has a broad footprint encompassing enterprises, service providers and high-end data centers.

With Sun, Oracle has an opportunity to exploit popular technologies, such as blade servers, in ways that it was unable to before. Furthermore, Sun plans to launch cloud storage and cloud compute services this summer that could complement Oracle's own cloud strategy.

Still, Sun's extensive software businesses were perceived as more attractive assets, providing a launch pad for Oracle's own software.

Given that more than 90% of Sun's revenue comes from hardware and related services, however, Ellison's desire to keep this part of the Sun portfolio is hardly surprising. The acquisition still sent ripples through the tech sector, though.

"Oracle's proposed purchase of Sun sets a new precedent in the consolidating technology landscape -- a software company buying a hardware company," wrote Ross MacMillan, an analyst at Jefferies & Company, in a recent note. "The deal will be accretive for sure, but it is an odd combination, even if there is strategic value in Oracle owning Java, Solaris and MySQL."

Stratecast analyst Karl Whitelock thinks that Oracle investors could benefit from new routes to market but warns that Ellison and his team have a lot of work to do.

"I think there's a lot of stuff that has to go on at Oracle to make this really well -- it's a much different paradigm," he told TheStreet.com. "They know how to sell software, but hardware?"

Whitelock explained that Oracle must also get a grip on the complex logistics of hardware manufacturing and distribution, not to mention convince customers that it is a viable server and storage supplier.

Expect Oracle's talismanic CEO to be front and center in this effort.

"If anyone can make Sun's hardware fit into his business model, Ellison can," said an Oracle investor, who asked not to be named. "In my opinion Ellison is one of the very best at executing a well-balanced vertical and horizontal integration."

The Oracle supremo certainly has an impressive M&A record, and his firm has swallowed some massive deals in recent years, including PeopleSoft, BEA, and Siebel Systems. Like Oracle itself, however, all these companies are predominantly software firms, so Sun represents a journey into uncharted waters.

Despite the risks of purchasing Sun and its hardware, Stratecast analyst Whitelock thinks that Oracle investors should not be too concerned. "I think that Oracle has got a big enough amount of staying power," he said. "If there's something here that Oracle doesn't want, then they will determine that down the road and sell the assets off."

The Redwood Shores-Calif.-based firm is not the only leopard changing its spots at the moment, as evidenced by Cisco's ( CSCO) recent entry into the server market and Hewlett-Packard's ( HPQ) efforts to sell networking gear.

Oracle shares slipped 10 cents, or 0.54%, to $18.32, reversing the broader advance in tech stocks that saw the Nasdaq rise 1.33%.

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