SmicroCaps

As a technology specialist, Monday’s blockbuster deal between Oracle (ORCL) and Sun Microsystems (JAVA) left me fielding questions from a number of investors. Following the breakdown of Sun’s talks with IBM, Scott McNealy’s company seemed like the unwanted stepchild of the data center. Why would Oracle want them? There are plenty of reasons. First and foremost, there is MySQL, the database platform that Sun acquired for $1B in early 2008. MySQL has been the fastest growing database platform in the market and has long been a thorn in Oracle’s side. Oracle even purchased some of the internal technology within MySQLto disrupt the platform’s advancement. Now Larry Ellison and company control an even larger share of the database market, can maintain or improve margins and have the ability to offer best in class proprietary or open source database solutions. Meanwhile, IBM’s DB2 is losing share and big blue missed a serious opportunity to revitalize its RDBM segment.

Next, of course, there is Sun’s ticker and omnipresent development platform, Java. Twelve years ago, I recall the novelty of taking my first college level computer science classes in Java rather than Pascal. Java is under pressure from the likes of C# and PHP, but it is still the premier development platform and a crucial component of custom enterprise applications. Is there any wonder why Oracle representatives said that Java is “the most important software that Oracle has ever acquired.” Java is, quite simply, the crown jewel of Sun.

There’s a slew of other great assets in Sun’s business. Solaris, OpenOffice, UltraSPARC to name just a few. The big issue has been that they don’t necessarily work together and this is clear in the company’s recent profitability. Notice the upward trend in the top line despite erratic net income.

While Jonathan Schwartz assumed the role of Sun’s CEO in 2006, the bulk of this failure has to be on former CEO and current chairman Scott McNealy. If management can’t trim and/or control costs, then someone else will come in and do exactly just that. While IBM missed that opportunity, Oracle will once again show that the company is the corporate master of rapid acquisition and integration. Regardless of what Oracle does with some of Sun’s assets, it’s clear that there is value to be found in tech M&A.

Still, I don’t believe that this is an opportunity to buy large cap technology names. Like Barron’s points out this weekend, it’s an opportunity to capitalize on the M&A wave and establish positions in target companies. We saw this again last week with Broadcom’s (BRCM) bid for Emulex (ELX). There are plenty of small cap technology names with depressed valuations that could provide tremendous synergies with large cap tech companies in both hardware and software. Mid caps will likely not be snapped up since the few independent names that are still left are either viewed as “lame ducks” (CA, SY, etc) or have incredibly strong cultures that make integration more difficult (RHT, CRM, etc). I’m keeping my eye out for inexpensive small cap tuck-ins that can offer real value to cash rich companies looking to enhance growth.

Disclosure: The author does not have a position in any of the mentioned companies.