70% Off Sale!

There has been a fair amount of hand-wringing along Sand Hill Road in Menlo Park over the lack of “exits” – IPOs and acquisitions – for venture-backed technology companies. Given the way the stock market has behaved recently, it’s pretty near impossible for a young technology company to go public. And the large technology companies that do most of the acquiring have been unusually quiet, presumably because they are watching their cash and avoiding risks given the global economic downturn.

However, there’s one major reason why large technology companies should be buying:


Blue is the share price of Oracle; red is the price of Sun (the spike in March is Sun’s merger negotiations with IBM). At some point, prices fall to the point where people start buying again. While the recession has hurt almost every company, it disproportionately hurts companies that do not have fat profit margins, hordes of repeat customers, and deep cash reserves that they can rely on in hard times. The result is huge changes in the relative values of companies, creating some once-in-a-generation bargains.

I don’t think the Oracle-Sun acquisition is a sign of a bottom or anything dramatic like that. But it shows that at least some companies are doing what they should be doing.

By James Kwak

45 thoughts on “70% Off Sale!

  1. I’m not sure “what they should be doing” means. Do you mean that fostering consolidation and lack of competition is a good thing? Hasn’t this been proven to be a bad thing since the breakup of Standard Oil in 1911?

    In this particular case, Sun sells an open source, freely available, database product. Oracle sells it proprietary, very expensive, rival product called, of course, Oracle.

    Sun also sells some, not very leading edge anymore, server hardware and supports the mostly free language java. If Oracle is true to prior patterns it will de-emphasize the rival database product and push people into its own offering.

    Who does this benefit, aside from Larry Ellison? Companies buying and burying competitors are never a good thing for the public, for innovation and for economic efficiency.

    Apparently the lessons of the trust busters have been lost along the way. I don’t see Obama making any big push to reform consolidation.

  2. Oracle’s acquisition of Sun and especially MySQL could pose a very big problem for some websites who develop databases on the cheap. MySQL is free and relatively easy to set up; Oracle is expensive and kludgy. Like many apps that have cornered the database market in big companies, Oracle doesn’t innovate.
    Maybe the hardware side of the acquisition makes sense but I’m guessing that web developers are going to be justifiably anxious over this.

  3. Your argument would make more sense if Sun was a strong company on its own accord. However, Sun never truly recovered after the tech crash earlier this decade.

    Also, Oracle and MySql aren’t truly competitors in the sense that both products can perform the same functions. MySql is still little more than a hobbyist db — it may be appropriate for simple data (e.g. web sites), but any application dealing with complex data and robust user requirements will have to use a ‘real’ database.

    The way I see it, Sun was a smart buy for Oracle.

  4. phil, what you say is correct in that mysql can’t be subsumed into the oracle database product. they are two very different animals.

    java’s customers that are also oracle’s current customers — large enterprise server side j2ee users essentially — should find themselves better supported post-merger, especially if they don’t mind hardware lock-in.

    however, the java language is a platform for more than that.

    it goes against history to say that oracle would be responsive to other kinds of users (smaller business users, or people writing high performance j2se servers, or people working on the java front end, etc)

    it also goes against history to say that oracle is going to be responsive to the developer community for their own sake, and that is very important for language adoption.

  5. Java in the hands of Oracle is probably not a bad thing – better than many of the alternatives. MySQL, not so good, however MySQL I believe is GPL so in theory someone should be able to spin off their own distribution and maintain it. Oracle would probably be smart to show their “magnanimity” and do something similar to what Netscape did with the Mozilla project.

    Oracle has shown a dedication to Open Source, so there is some hope. However MySQL has undoubtedly eaten into their market so there should be some concern (this web site no doubt has MySQL behind it). GPL doesn’t mean you give up copyright ownership outright, so there are unfortunately some nefarious possibilities. Let’s hope Oracle does the right thing here.

  6. The same consolidation arguments that favor big companies eating small companies also favor big (stable) banks eating small banks.

    And making even bigger banks.

    Also, the same deflation arguments that are inducing consumers to wait to buy cars, are also inducing big companies to wait to buy competitors.

    Small companies are on sale, but the sale could be even better next week!

  7. I always thought “the” Sandhill road was on the edge of the Stanford Campus in Palo Alto,

  8. q,

    Sun has already open sourced the language and, IMO, innovation is occurring primarily in languages that target the JVM rather than in Java. (Scala, Groovy, etc.) In fact, I work at the company that James helped found, Guidewire Software, and we’ll be releasing a new JVM-based language Real Soon Now ™

    I don’t see Oracle treating Java any worse than Sun and the JCP has over the last half-decade…


  9. StatsGuy,

    Software development has negative economies of scale beyond a pretty small number of people (the n-squared problem, where the complexity of a system tends to increase with the square of the number of interacting parts) so I don’t worry too much about consolidation in the software industry. Microsoft is huge, evil, monopolistic and yet strangely impotent in the face of many smaller and more agile competitors. Their OS is a disaster. Oracle hasn’t been able to turn out a bedrock product since its database and just buys market share (see Weblogic, which also got too big and stopped innovating.) Even Google innovates primarily through acquisition these days.

    Maybe that’s one reason why software/tech guys like me tend to be market libertarians: we’ve seen it work out pretty well in our industries. (I still think that if we let the big banks fail, smaller community banks and startups would have stepped into the breach, and we’d be much closer to a real recovery at this point.)


  10. There is a cluster of VC offices at the top of Sandhill, just before 280.

    As far as I can tell watching the traffic outside my window, these offices are the only think keeping Tesla Motors in business.


  11. Phil,

    Tell that to Google. When I interned there four years ago AdWords was run on MySQL.


  12. I think the author means these stocks are behaving in a somewhat non-depressive manner unlike the rest of the market, as opposed to some inherently righteous behaviour by the companies in particular? And one would expect to see rational behaviour in stocks that have already priced in the long hard recovery. And so while maybe all the stocks aren’t at a bottom, some techs probably are. Not sure I agree, but I don’t think he was getting into the details of Larry Ellison’s elaborate Japanese Samurai home we’re all jealous of.

  13. statsGuy: except that large software companies aren’t propped up by taxpayer dollars.

    ah, but you did say stable. does this comment also refer to large banks that have been “stabilized”?

  14. Oracle and Sun seem to me to have a more compatible corporate culture. They are aggressive competitors that value highly skilled and creative engineers. IBM is more of an outsourcer (basically IBM is moving to India). This is better for employment in Silicon Valley than an IBM buy would have been, though there will be cuts of course.

    As for Java – interesting. I hope Oracle modernizes the language appropriately. I think Microsoft has been more aggressive in improving the feature sets of .Net languages. Sun is not customer focused, they are technology focused, which has made them oddly resistant to adding useful features to Java. They would never do something like Linq, which is really useful.

    The combo of Oracle and Sun has real potential. Oracle is more customer and solution focused – the whole picture. If this works, and Oracle seems to be good at digesting acquisitions, it could be real trouble for IBM and, ultimately, Microsoft.

  15. Michael Arrington had a great post about this a couple of days ago in Tech Crunch, about how even the great Angel investors are laying low right now.

  16. hope you are right, CG.

    i’ve been away from java for the past couple years. during that time i have seen .net mature into a very nice platform.

  17. Look at REIT stocks too in order to see that certain stocks and industries may have hit a bottom. Some REITS still pay dividends all in cash and have incredible yields. Also, some corporate debt has incredible yields, way in excess of a reasonable risk adjusted premium to Treasury securities. Free market pricing is an amazing thing; to be taken advantage of by those who know and watch the markets frequently. For additional insights see http://www.bobgreenfest.wordpress.com.

  18. Ellison learned long ago by watching Gates: the only sure way to make money in the US today (short of gifts from the government) is to control a monopoly.

  19. All more or less true, although one primary argument to buying smaller competitors is to acquire a growing competitive threat in order to either assimilate or dismantle it.

    In other words, markets tend toward concentration over time, and many of the reasons why are bad reasons… which leave behind big ugly companies.

  20. Well, if Oracle bought Sun at $9.50/share (which is almost a 50% premium over the $5/share that Sun was getting when they were at bottom), then that would make this more like a 45% off sale, wouldn’t it?

    Regarding the original point of the post, this probably signifies nothing regarding the broader economy, as we have only so many multibillionaires with open checkbooks for large tech firms. And in this case in particular, it’s hard to tell what proportion of this move is a function of Larry having a plan for disposing of Sun’s still-valuable assets profitably, and what proportion of this move is a function of Larry’s ego getting in the way of his business judgment. Larry might have some good ideas for the software business; I don’t know what he thinks he would do with the hardware business apart from spinning it off. In any case, the actions of Larry Ellison are, as usual, sui generis and should not be taken as any sort of trend.

  21. > . Microsoft is huge, evil, monopolistic and yet strangely impotent in the face of many smaller and more agile competitors. Their OS is a disaster. Oracle hasn’t been able to turn out a bedrock product since its database and just buys market share (see Weblogic, which also got too big and stopped innovating.) Even Google innovates primarily through acquisition these days.


    You must have come into the software industry after the DOJ threatened to break up Microsoft.

    Nobody who had to deal with Microsoft’s lawyers (their strategy being to sue potential competitors while they were too small to defend themselves) in the 1980s and early 1990s would agree with you about an operational free market.

    And software developers as a class believe more in the free market because it has worked for them, not because they have been able to show that it works for anyone else.

  22. The beauty of the Tech sector is that they never have to pay a dividend or show a profit to attract hedge fund money. This allows the Ponzi to continue…until it ends.

  23. Sam,


    All I’m saying is that MySQL is (or at least was) being used by perhaps the most profitable large-scale software system written in the last decade.


  24. StatsGuy,

    Right, but those big ugly companies become irrelevant as they ossify. Look at what happened to IBM. Or what has happened to Microsoft. In a healthy, competitive environment like you have in technology, better mousetraps are cheap to make and deploy and, thus, large companies advantageous positions seem to be inherently unstable.


    I don’t think the DOJ did much to bring down Microsoft. Instead, over a period of a decade, Microsoft’s own institutional trend towards rent-seeking rather than technological improvement ended up sinking them. (That’s not to say that they aren’t relevant, they just don’t have the position they once had.) I remember as a young lad thinking that Microsoft would never, ever lose. Now I watch Mac ads brutalize them every night on TV. It seems to me that the wheels of the market sometimes grind more slowly than we’d like, but that they also grind exceedingly fine.


  25. Carson,

    I think you are arguing from ideology and not letting facts get in the way. An ossified dinosaur just purchased a technology that is part of nimble technology infrastructure. When you say ‘better mousetraps are cheap to make and deploy’, you are taking for granted that this infrastructure is there.

  26. q,

    You may want to examine the top technology companies in the 70s and where they are now. Do this for 1 generation and than 2 gen, and etc. than assess your conclusion.

  27. i didn’t say that the markets are completely dysfunctional in technology. i said that oligarchic technology companies stifle innovation, sometimes in material and overwhelming ways, sometimes for years and years, and that they don’t always ‘play fair’.

    the example i gave was microsoft, which from the start produced crappy technology and instead preferred to employ legions of marketers and lawyers to stay ahead.

    honestly, i have no idea why one wouldn’t expect this to happen again and again, and i don’t understand why you choose to see this as the reality (with innovation around the edges) as opposed to innovation as the reality (with oligarchy at the edges). that’s why i think that you have ideological blinders on. myself, i don’t believe that technology markets are intrinsically any more free than any other markets. there is currently a greater rate of change and smaller margin of error, but that’s not going to last forever.

    cheers / q

  28. Sorry, but that doesn’t sound like a very informed opinion about MySQL. MySQL is _not_ a hobbyist DB. It’s a solid DB that is used in many, many large web sites. Google uses MySQL very heavily (and open-sourced their “sharding” code). It’s cheaper to operate than Oracle (talk to eBay to see how much they spend on Oracle — and they had to turn off transactions to get sufficient speed) and performs well. You can even run MySQL on Amazon’s cloud (EC2).

  29. Ugh. While this may be good for Oracle I expect Larry Ellison to gut SUN. We are going to lose a lot of innovation and creativity. And even more people will find themselves unemployed in the worst economy since Would War II. What’s good for business is not necessarily good for the country — but somewhere along the way we have lost sight of that.

  30. q,

    _shrug_ Maybe.

    Let me site some facts: the DOJ didn’t ever get Microsoft to change a damned thing meaningful, and yet Microsoft still fell due to it’s own missteps and monopolistic behavior. Intel (Intel! Home of “Only the Paranoid Survive”!) missed it’s stride for about six months and AMD nearly got them. IBM, *the* monopoly par excellence, almost died in the 90’s, and only survived by radically transforming its business. If you walk around Gates Hall at Stanford, you’ll see plaque after plaque noting the donations of large, failed companies who died at the hands of smaller, more agile competitors. It’s like a mausoleum.

    This all leads me to believe that the crucial thing is that the government let big companies fail and allow new blood and companies into the market to eat the carcass. As Chesterton said: too much capitalism isn’t too many capitalists, it’s too few capitalists. That expresses an ideology, no doubt, but I don’t think it’s entirely divorced from evidence.


  31. Carson,

    I’m going to abuse this forum and change the subject.

    A number of people — I am not sure if you are among them, but I’d not be surprised — have brought up in passing the idea of a nimble financial system based on an “network” model analogous to a communications network — a system made of interconnected, swappable “banks”. Are you aware of anywhere that’s really been discussed?

  32. James,

    Nice argument. The chart supports the thesis, to be sure. But it’s not compelling evidence that Sun was “undervalued”. In fact, my view is that Sun is a dying company because their part of the dot com revolution – the making of server hardware and operating systems – is becoming a commodity. Commodities to not justify high profit margins. It’s operating system is just Unix with some nice features. Google doesn’t need bells and whistles in their OS.

    As someone who has worked for almost 5 decades in IT, the question I had was, “Why is Larry Ellison paying that much for hardware he doesn’t want and software he doesn’t need?”. Larry Ellison is, as everyone knows, nobody’s fool.

    I read the answer yesterday. MySQL. My what? It’s the fastest growing database software in the world. It’s free. And it’s open source. But, in some sense, Sun owns it. I was in charge of a decent sized ERP operation (Sun servers, Oracle database). I used Oracle because, although it was expensive, it was bullet proof, it never lost your data. But MySQL is much cheaper and, as a result has been growing quite rapidly. That is a threat to Oracle. Ah, it WAS a threat. Larry said words to the effect that Java was the most important piece of software he had ever acquired. I wonder if he actually used the word Java.



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