EC Throws Monkey Wrench Into Oracle, Sun Deal

Europe is ratcheting up its opposition to Oracle's (Nasdaq: ORCL) proposed US$7.4 billion acquisition of Sun Microsystems (Nasdaq: JAVA). The European Commission has issued a formal statement of objections to the deal , based on a perceived threat to competition.

Competition Commissioner Neelie Kroes raised those concerns last month in a meeting with Oracle's top executives, arguing that Oracle ownership of Sun's open source MySQL database software would represent unacceptable consolidation in the database space.

Two nonprofit European organizations, the Open Rights Group and Knowledge Ecology, joined software developer Richard Stallman in sending a letter to Kroes on the proposed acquisition, citing users' fears that Oracle would focus its attention on its proprietary database to the detriment of MySQL.

Oracle responded sharply to the EC's latest action, as it has in the past, citing the U.S. Department of Justice's approval of the deal and the fact that there are eight strong database companies in the European market, among other factors.

DoJ's Position

The Justice Department also weighed in on the matter after the EC issued its statement, reiterating the variety of choices it believed customers would still have a after an Oracle-Sun merger.

Although that was an unusual move, the Justice Department has little influence over its European counterparts, noted Ryan Radia, an analyst with Competitive Enterprise Institute.

The U.S. and Europe approach antitrust issues differently, Radia told the E-Commerce Times. The U.S. approach is formulaic, based on established law that has been tested and subsequently upheld in various court decisions. The EC, by contrast, traditionally tends to give greater scrutiny to business arrangements on a case-by-case basis.

The acquisition of Sun Microsystems by Oracle was certain to prompt an investigation, he said, but this latest development is particularly worrisome because it represents the start of a process that could end with the EC requiring a divestiture of MySQL before the deal can go forward.

If history is any guide, the situation is not looking good for Oracle.

"The last time the Department of Justice commented on a pending investigation by the EU -- in 2000, regarding the proposed GE takeover of Honeywell -- the EU ended up blocking the proposed deal," Trey Branham, a principal in the Law Offices of Charles W. Branham, III, told the E-Commerce Times.

There are some differences in the two situations, however. GE and Honeywell occupied a much larger portion of their market in 2000 than Oracle and Sun do, he pointed out.

"MySQL is not a major product in Europe," noted CEI's Radia. "It accounts for small portion of Sun's overall revenues, and it is also open source. There is no reason to believe that ability of users to license MySQL and support it would change under the deal."

The question the EC is likely mulling, though, is whether the proposed new entity will occupy such a large portion of the marketplace as to have a truly unfair competitive advantage, Branham said.

"U.S. investigators answered that question in the negative, but the EU has different rules and guidelines. Traditionally, the EU takes a harder line on mergers of this size," he reiterated.

What's Next?

With the possibility appearing stronger that the EC will only approve a deal that does not include Oracle's takeover of MySQL, speculation is turning to what such a deal would look like for Oracle -- if it survives at all.

Oracle CEO Larry Ellison ruled out spinning off MySQL in a speech at an industry gathering in September. Even though Sun was losing about $100 million a month due to the merger's delay, he said, Oracle had no intention of selling it off to satisfy Europe's concerns.

Of course, if the fate of the entire acquisition were hanging in the balance, he might change his mind.

"From a revenue perspective, I don't think MySQL is all that critically important for Oracle in its grander strategy for the Sun acquisition, Jarrad Zalkin, vice president of TM Capital, told the E-Commerce Times.

"This deal is about Oracle becoming a total tech and solutions provider in the same fold and style as IBM (NYSE: IBM). Spinning off MySQL would not derail that, although it could be a blow to any plans Oracle might have for making inroads into the SMB database market."