UPDATE Oracle buys Sun for $7.4bn

Oracle has announced plans to buy Sun Microsystems in a deal valued at $7.4 billion (£5.07 billion).

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Oracle has announced plans to buy Sun Microsystems in a deal valued at $7.4 billion (£5.07 billion), plunging the enterprise software vendor into the hardware market and making Sun the latest company to be subsumed by the Silicon Valley giant.

Oracle buys Sun for $7.4 billionThe deal comes just weeks after a reported deal by IBM to buy the Java software maker fell apart.

Oracle will acquire Sun common stock for $9.50 per share in cash in the deal, which is valued at $5.6 billion net of Sun's cash and debt.

Oracle is no stranger to big acquisitions, and has bought a series of software firms in the last few years including PeopleSoft, BEA and Siebel Systems.

Though there were rumours Oracle might purchase Sun, it has never before had a hardware or server operating system business, a market in which a significant amount of Sun's assets are tied, so the deal seemed unlikely. However, Sun's Solaris long has been a successful platform for Oracle's database business.

The two companies also have areas of common interest in their support for Java software, one of the only areas where the companies' product lines overlap. Sun has an open-source Java application server called Glassfish that Oracle likely will hold onto, although the fate of Sun's other commercial Java software, the Java Enterprise System (JES), is unknown.

Oracle also had overlap in this area when it purchased BEA, but BEA WebLogic had significant installed base, and Oracle kept the product alive. Sun's installed base for JES is smaller, so Oracle may choose not to hold onto it.

Oracle said the Sun deal should bring the company more revenue in the first year than the company planned for its acquisitions of BEA Systems, PeopleSoft and Siebel combined.

"We estimate that the acquired business will contribute over $1.5 billion to Oracle's non-GAAP operating profit in the first year, increasing to over $2 billion in the second year" said Oracle President Safra Catz.

"The acquisition of Sun transforms the IT industry, combining best-in-class enterprise software and mission-critical computing systems," said Oracle CEO Larry Ellison in a statement.

"Oracle will be the only company that can engineer an integrated system - applications to disk - where all the pieces fit and work together so customers do not have to do it themselves. Our customers benefit as their systems integration costs go down while system performance, reliability and security go up."

Sun Chairman Scott McNealy welcomed the deal. "This combination is a natural evolution of our relationship and will be an industry-defining event."

For Sun, the deal will bring an end to CEO Jonathan Schwartz's efforts to turn the struggling company around. Sun's sales have been declining since their peak during the dot-com boom, as customers turned away from its pricey Unix servers in favor of x86 systems. Sun's share price has also fallen sharply.

Efforts to attract new customers with open-source software, and Sun's belated decision to enter the x86 market, have not paid off fast enough to give it the boost it needs.

With Sun on board, Oracle now will have to figure out how to navigate the server OS and hardware business. In addition to supporting Solaris for many years, Oracle also supports its software on Linux. Though Sun's hardware does not have the reach that its former suitor IBM's does, the deal gives Oracle a combined hardware/software business model more akin to IBM's, with which it now competes in the database market.

See also Oracle's presentation on Sun purchase .

James Niccolai in San Francisco contributed to this report. More details to come

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