Oracle's Next Move: Buy Apple or Wyse?


Many of us assumed that once Oracle bought Sun (which doesn't appear to have universal Sun shareholder approval), it would spin off or shut down the hardware side of the company. Apparently, that assumption is wrong. Oracle is going to evidently make a run at the hardware market using Sun as the core it will build from. But both Oracle and Sun at one time wanted to buy Apple to market a complete client/server solution. Oracle backed off and Sun thought the company, even at its lowest point, was still too expensive.


If the Sun acquisition is successful, could Apple be next on Larry Ellison's shopping list? How about Wyse or Clear Cube?


Let's start with what is likely on Oracle's mind in terms of keeping the hardware and then talk about the set of conditions that would probably have to exist before it picked up Apple.


Oracle's Hardware Plan


It is generally foolish for a software compay to move into the hardware business. The margin expectations are set very high and hardware simply can't reach these expectations, which means the more hardware revenue you make, the lower your company's valuation drops. For hardware companies, the problem is available market; a hardware company generally can only sell a software solution on its own hardware, limiting dramatically the available market and potentially turning software partners into competitors.


For Oracle to even think of doing this, it must believe its existing customers are so locked in that they won't move, so Oracle can compete effectively with hardware against software-only solutions. This is a very risky path because it potentially puts new business at risk and creates a perceived risk surrounding staying with Oracle. The increasing perceived risk, one that competitors would focus on, would be the perceived growing inefficiency between Oracle and non-Sun based hardware. This would provide ammunition for a growing number of ex-Oracle partners, like HP and Dell, who now see Oracle as a competitor to their server business.


Oracle didn't get where it is without being willing to take risks but, even for them, this is pushing the envelope.


Apple Merger


Both Oracle and Sun at one time thought about purchasing Apple, and the company is now vastly more valuable. It seems doubtful that either firm could have accomplished what Steve Jobs did. The core drivers for Apple's recovery came from MP3 players and smartphones, neither of which Oracle or Sun have shown any real interest in. In addition, Apple's sustained strength is on the consumer and small business sides of the market, areas where both Oracle and Sun have been historically very weak.


However, with Oracle shortly in the hunt for a way to complete its hardware solution on the desktop, a partnership or merger with Apple could be interesting. Now if it weren't for Steve Jobs' health, I'd bet more on a partnership and expect that this will be where the relationship might start, regardless. Oracle could simply take the responsibility for marketing Apple PCs to enterprises from Apple and wrap the machines with a blend of Oracle and Apple services. Long term, however, I would expect that conflicts surrounding the margins shared between the two companies would cause problems. In other words, both are likely to feel they are doing the heavy lifting and should get the lion's share of the related profits.


When Larry gets upset about things like this, he tends to go on a buying spree. Apple would be his first choice, whether it wanted to be or not. The price for Apple, particularly if the takeover was a PeopleSoft-like hostile takeover, is too high, which suggests he would either need Jobs' backing (in other words it wouldn't be a hostile takeover) or Apple would need to fall dramatically in valuation.


This last is likely after Jobs' departure and should the company's revenues fall, which is also likely after Jobs departs. Timing for the partnership would likely be around 12 to 24 months after the Sun acquisition is complete, placing the initial deal in the mid-2010 to 2011 timeframe and any attempted acquisition after this. This could move up should Jobs initiate the relationship to protect Apple in anticipation of his permanently stepping down. Currently, Apple maintains that such a move is not imminent, but Apple has not historically been particularly accurate on Steve Jobs' future behavior.

However Oracle is more likely to favore Wyse.


Wyse More Attractive


Larry Ellison was one of the first big believers in thin clients and actually had a better financial handle on the market than Scott McNealy did. Scott had no real idea of how much an IT organization might be willing to pay for something like this. While the SunRay 1 & 2 (Sun's thin client offerings) were very powerful, they were also way too expensive and largely failed in the market. It is interesting to note, however, that Larry's effort actually failed faster.


But the concept of a thin client plays well to someone who lives in the glass house and came up during the mainframe years. It has the security and scale advantages of a terminal and, at least on paper, the performance of a PC. The problem has been the lack of industry standards preventing competitive bidding in the out years, the initial risk, and the massive pushback by users who have no desire to return to the "big brother" years.


Larry is likely still somewhat blind to the shortcomings of this technology, which have admittedly declined substantially since the inception of this concept. While the segment has not grown to expectations it has slowly grown.


Wyse is the current independent market leader and HP has largely bought up the rest of the market. Oracle should find Wyse both more affordable and closer to where Larry likely still may believe the enterprise market should be going. In addition, this is likely a technology Oracle could sell best, and much of Apple's valuation is in things Oracle really doesn't care about.


As a result, Wyse is likely the more interesting acquisition short term. Another alternative is Clear Cube, a firm that makes blade PCs, but given Larry's tie to the creation of thin clients, I think he would find Wyse more attractive.


Wrapping Up: Apple Possible, Wyse More Likely


Oracle now needs a desktop strategy to complete the set. I don't think the timing and product set that Apple has is ideal and the price is outside of Oracle's budget. The wild card is Steve Jobs and his need to find someone who can husband his company. Larry Ellison is one of the few people Steve may trust and one of the few that may have the personal charisma to pitch Apple's products successfully to an audience.


However, Oracle's own needs and interests make Wyse the more interesting target. If the firm were to acquire one of them, the odds would favor Wyse, or possibly Clear Cube, over Apple by a significant margin.