Oracle Corp. pounced on Sun Microsystems Inc. in a $7.4 billion deal Monday after rival IBM Corp. abandoned its bid to buy Sun, a server and software maker that had a 27-year run as Silicon Valley's brash independent.
Redwood Shores, Calif.-based Oracle said it will pay $9.50 in cash for each Sun share. The price represents a 42 percent premium to Sun's closing stock price of $6.69 on Friday, and is nearly twice what Sun was trading for in March, before word leaked that IBM and Sun were in buyout negotiations. Net of Sun's cash and debt, the transaction is valued at $5.6 billion, Oracle said.
IBM had offered to buy Sun for $9.40 per share, but acquisition talks fell apart this month in a disagreement over price and the extent to which IBM was willing to see the deal through an antitrust review.
Oracle expects the purchase to add at least 15 cents per share to its adjusted earnings in the first year after the deal closes. The company estimated Santa Clara, Calif.-based Sun will contribute more than $1.5 billion to Oracle's adjusted profit in the first year and more than $2 billion in the second year.
Sun, which invented the Java programming language used to develop applications for Web sites and mobile phones, had been reluctant to sacrifice its independence, even as it reported big losses. Despite billions in sales -- $13.3 billion over the last four quarters -- the company has not been able to turn a consistent profit, losing $1.9 billion in the same period.
Analysts have long said the company can not stand on its own and many were skeptical the company would be able to find another buyer after talks with IBM broke down.
A deal with Oracle might not be plagued by the same antitrust issues, since there is significantly less overlap between the two companies. Still, Oracle could be able to use Sun's products to enhance its own software.
Oracle's main business is database software. Sun's Solaris operating system is a leading platform for that software. The company also makes "middleware," which allows business computing applications to work together. Oracle's middleware is built on Sun's Java language and software.
Shares of Sun jumped $2.46, or 36.8 percent, to $9.15 in premarket activity while shares of Oracle fell 68 cents, or 3.6 percent, to $18.38.
Sun's takeover is a reminder that a few missteps and bad timing can cause a star to come crashing down.
Sun was founded in 1982 by men who would become legendary Silicon Valley figures: Andy Bechtolsheim, a graduate student whose computer "workstation" for the Stanford University Network (SUN) led to the company's first product; Bill Joy, whose work formed the basis for Sun's Unix-based operating system; and Stanford MBAs Vinod Khosla and Scott McNealy.
Sun was a pioneer in the concept of networked computing, the idea that computers could do more when lots of them were linked together. Sun's computers took off at universities and in the government, and became part of the backbone of the early Internet. Then the 1990s boom made Sun a star. It claimed to put "the dot in dot-com," considered buying a struggling Apple Computer Inc. and saw its market value peak around $200 billion.
But Sun was slow to react when the bottom fell out in 2001. Its high-end products, built on Sun's proprietary systems and its own microprocessors, suffered against less-expensive rivals that used industry-standard technologies such as chips from Intel Corp. and Advanced Micro Devices Inc. and software from Microsoft. Sun lost more than $5 billion in the first five years after the bubble burst.