Sun deal: IT giants' distinctions melting

Oracle’s Larry Ellison is one of the most active buyers of technology companies. Now he’s ponying up $7.5bn, or $9.50 per share in cash, for Sun Microsystems. The deal looks good: It snatches Java, a key programming language, from the clutches of Oracle’s rival IBM. And the 42% premium to Sun’s closing stock price on April 17 isn’t that outrageous – IBM had offered only slightly less. But Sun is predominantly a hardware company and Oracle is a software group. The deal shows how industry distinctions among tech’s giants are melting rapidly.

Ellison has done well over the past five years hunting and bagging zombie software companies. Many have stagnant sales and shrinking margins. Oracle buys the companies on the cheap, slashes operating costs, and starts selling the newly acquired software to its existing clients.

Last year’s acquisition of BEA Systems was a bit of a turning point. The purchase meant Oracle was now selling middleware, or software that acts as a bridge between different applications. This put the company in competition against other middleware companies such as IBM.

Purchasing Sun confirms this shift by enlarging Oracle’s middleware business. More importantly, the deal means Oracle now goes up against IBM and HP in selling servers.

It is another example of how tech companies are entering each other’s turf. Cisco, for example, announced in March it was jumping into the server market by selling gadgets that combined lots of formerly separate pieces of hardware. And Google has made it increasingly clear that it wants a piece of the office software market.

The reason for these moves is partly technological. Progress makes devices cheaper and able to do more things. An even bigger driver is financial. The IT sector had largely matured before the financial crash. Now, budgets are shrinking – global spending on technology products and services is projected to decline 4% this year according to research outfit Gartner.

The end result seems clear. Increased competition should lead to lower prices and margins across the sector as companies try to steal market share from one another. If good fences make good neighbours, then tech is set for a period of unpleasant incivility.