After IBM dalliance, Sun goes to Oracle for $7.4B

Sun Microsystems Inc.'s scramble to find a suitor landed the slumping server and software maker in the arms of Oracle Corp., which agreed to pay $7.4 billion in cash for Sun in a startling marriage that would transform Silicon Valley and the computing industry.

The acquisition announced Monday illustrates how some of the biggest and richest technology companies are racing to become one-stop shops for corporate and government customers. By picking up Sun and expanding heavily into hardware, Oracle would look much more like the company it beat out for Sun �� IBM Corp., which appears unlikely to re-enter the bidding.

Heavyweights like IBM, Hewlett-Packard Co., Cisco Systems Inc. and now Oracle all want to offer a richer mix of technology products. The companies hope to find more hooks into customers and use those relationships to sell other kinds of stuff.

That setup, with a broad mix of services, software and hardware, helped Armonk, N.Y.-based IBM escape financial ruin in the 1990s and become one of the industry's most profitable companies. IBM has forked out nearly $13 billion on 40 acquisitions since 2006 to expand its offerings. HP has followed suit, spending $13.9 billion for services provider Electronic Data Systems last year.

Santa Clara, Calif.-based Sun lacked that kind of scale, especially after the tech meltdown of 2001 knocked the company off balance and led to a decade of financial pummeling.

Sun's best sellers are computer servers and machines that store data on tape. But Oracle and IBM mainly had their eyes on Sun's software.

The deal would give Oracle ownership of the Java programming language, which is a key element of the Internet and runs on more than 1 billion mobile devices worldwide. Oracle would get the Solaris operating system, which already has been a platform for Oracle's products. And Oracle would get Sun's MySQL database software, which has undercut Oracle and siphoned some sales away.

All these products are open-source, which means their underlying code is distributed freely on the Internet. To make money from the software, Sun sells support contracts alongside those programs. Like IBM before it, Oracle believes it can make money off those properties better than Sun can, partly by selling other products in package deals.

Forrester Research analyst Ray Wang thinks Oracle could keep MySQL to put pricing pressure on Microsoft, a longtime Oracle nemesis that sells a less expensive database product.

"With the acquisition of Sun, Oracle is now able to make all of the pieces of the technology stack fit together and work well," Oracle Chief Executive Larry Ellison said during a Monday conference call.

But unlike IBM, Oracle is a surprising suitor because it doesn't make hardware. Although Sun wouldn't be Oracle's biggest acquisition during a four-year shopping spree that has cost about $40 billion, it may be the boldest.

Some analysts suspect Oracle might try to sell Sun's hardware divisions if they turn out to be a drag.

"This is a really strange deal to me �� Oracle buying all this hardware, I wonder what they're going to do with it all," said Jane Snorek, an analyst with First American Funds. "I don't know what to think, frankly. It seems everyone wants to be IBM and have a mix. If it wasn't the for the fact that Oracle is such a good acquirer, I'd be negative" about the deal.

Oracle shares sank 24 cents, 1.3 percent, to close at $18.82 in trading Monday. Sun shares jumped $2.46, 37 percent, to $9.15.

Oracle's offer �� which is valued at $5.6 billion when Sun's cash and debt are taken into account �� amounts to $9.50 per share. That represents a 42 percent premium to Sun's closing stock price of $6.69 on Friday, and is about twice what Sun was trading for in March, before word leaked that IBM and Sun were in negotiations.

While Sun wouldn't be Oracle's most expensive acquisition, it will be the largest in terms of the people involved. Sun employs about 33,500 workers, far more than the roughly 12,000 that PeopleSoft had when Oracle bought that company in 2005 for $11.1 billion �� the biggest outlay during Oracle's expansion.

Oracle, which already has roughly 86,000 workers, didn't specify how many people will lose their jobs after it takes control of Sun. The cuts might not be as dramatic as they would have been in an IBM acquisition because Sun and Oracle have fewer overlapping products.

The smaller overlap also could keep Oracle from facing the antitrust objections that IBM likely would have prompted with Sun. Indeed, one of the sticking points in the IBM-Sun negotiations was the level of assurance Sun sought that IBM would see the deal through a regulatory review. Regulators figured to look closely at the way that swallowing Sun would expand IBM's lead over Hewlett-Packard in certain markets for servers and data storage.

Oracle already says the Sun acquisition, which it expects to close this summer, will add at least 15 cents per share to its adjusted earnings in the first year after the deal closes. The company estimated Sun will contribute more than $1.5 billion to Oracle's adjusted profit in the first year and more than $2 billion in the second year.

With former investment bankers Charles Phillips and Safra Catz steering things as the company's co-presidents, Oracle has been able to hit its financial targets in all its acquisitions during the past four years.

That helped enable Oracle to earn $5.5 billion on revenue of $22.4 billion in its last fiscal year. Investors have enjoyed some of that prosperity too, with Oracle's stock rising about 35 percent since the PeopleSoft takeover was completed in 2005. Oracle recently decided to pay a dividend for the first time.

But Oracle's emphasis on increasing profits will likely raise concerns in its new role as the steward of Sun's open-source software.

"This gives Oracle the keys to the crown jewels of the open-source movement," said Wang, the Forrester analyst.

Ellison said Oracle intends to invest more heavily in Java than Sun has been able to afford as its fortunes waned. While Sun still has big sales �� $13.9 billion last year �� its profitability has been hit and miss. Earnings last year were $403 million, but from 2002 through 2006 Sun lost more than $5 billion.

The Sun-backed free OpenOffice software for word processing and spreadsheets also could be used to weaken Microsoft's franchise �� an objective that would delight Ellison, who, like Sun co-founder and Chairman Scott McNealy, has long sought to undermine Microsoft's dominance of the computing industry.

Microsoft said it didn't have specific comments on the Oracle-Sun deal, though Neil Charney, general manager of a software-development unit at Microsoft, suggested that customers "ask themselves if this will add more complexity and cost" to Oracle and Sun's products.

Oracle's takeover came together in just days. Sun and CEO Jonathan Schwartz needed a deal fast after IBM withdrew its offer this month in a dispute over the terms of a buyout, and on Thursday, Sun reached out to Oracle, according to people familiar with the negotiations. That prompted IBM to put its previous offer of $9.40 per share back on the table, but Oracle swooped in with the higher price, these people said. They spoke on condition of anonymity because the details of the talks were considered confidential.

A person familiar with IBM's position said the company isn't likely to rebid for Sun. IBM's chief financial officer, Mark Loughridge, even threw some competitive dirt on the deal during IBM's earnings conference call Monday.

"Oracle and Sun have been partnering for two decades �� and what's the result?" Loughridge said. "As I look at this and ask myself, `What's really changed,' I think, `nothing.'"

Yahoo Domains to cut nearly 700 jobs after 1Q results fall

Yahoo Inc. will lay off nearly 700 workers after getting off to a bumpy start under a tough-talking new boss who has promised to engineer a long-awaited turnaround at one of the Internet's best-known franchises.

Neither the lackluster first-quarter results nor the job cuts announced Tuesday came as a surprise.

Analysts had already predicted Yahoo's three-year slump would worsen during the first three months of the year, and hints about the payroll purge were leaked to the media last week.

Investors drove up Yahoo's stock, extending a recent rally propelled largely by media reports that the company is getting closer to forging an Internet advertising partnership with Microsoft Corp. as the two rivals try to counter online search leader Google Inc.'s domination of the advertising market.

In a Tuesday conference call with analysts, Yahoo Chief Executive Carol Bartz declined to comment on the status of the Microsoft discussions.

This marks Yahoo's third round of mass layoffs in little over a year, but the first batch since the Sunnyvale-based company hired Bartz in January. The cuts will affect about 5 percent of Yahoo's 13,500 workers. The estimated 675 people people losing their jobs will be notified during the next two weeks.

Yahoo dumped about 1,000 jobs in February 2008 and another 1,500 or so late last year while co-founder Jerry Yang was still running the company. Yang stepped down, largely because he wasn't able to snap the company out of its financial funk during his 18-month tenure as CEO.

Although it remains one of the most popular destinations on the Internet, Yahoo's fortunes have been declining since 2005 as Internet search leader Google Inc. sucked up more advertising revenue and trendy new online hangouts like Facebook and MySpace lured away younger Web surfers.

Yahoo earned $118 million, or 8 cents per share, during the first three months of the year. That represents a 78 percent drop from net income of $537 million, or 37 cents per share, in the year-ago period.

Last year's results included a non-cash gain of $401 million. But Yahoo's profit this year still would have been lower even after subtracting last year's one-time boost.

The latest earnings matched the modest expectations among analysts surveyed by Thomson Reuters.

Revenue fell 13 percent to $1.58 billion. If not for the stronger dollar, the sale of an e-commerce site in Europe and the loss of some fees, Yahoo said its revenue would have been down by just 3 percent.

After subtracting commissions paid to its ad partners, Yahoo's revenue stood at $1.16 billion �� about $50 million below analyst estimates.

Management indicated that Yahoo's results will erode again the second quarter, with total revenue expected to range from $1.42 billion and $1.63 billion. Yahoo's revenue totaled $1.8 billion in last year's second quarter.

Yahoo shares still surged 79 cents, or 5.5 percent, in Tuesday's extended trading after rising 72 cents to finish the regular session at $14.38.

In remarks elaborating on the layoffs, Bartz indicated she is trying to focus Yahoo more on its strengths in online news, finance, sports, e-mail and Internet search, where it ranks a distant second to Google.

In the process, she thinks Yahoo can free up more money to expand those products around the world and possibly hire more workers in those areas.

Yahoo product managers, in particular, appear to be among the most likely to receive pink slips, based on Bartz's blunt comments.

"We sort of had one product management person for every three engineers, so we had a lot of people running around and telling people what to do, but nobody was doing anything," Bartz said.

Falling bank stocks unravel rally; Dow loses 83

Nagging worries about banks upended a stock market rally Wednesday.

Volatile financial stocks steered the overall market for the third straight day after Morgan Stanley and credit card issuer Capital One Financial Corp. posted lackluster quarterly reports. Investors have been worried about rising levels of souring debt on bank balance sheets.

A late-session drop in banks left Wall Street's major benchmarks mixed. The Dow Jones industrial average fell 83 points, while the technology-heavy Nasdaq composite index ended modestly higher ahead of a quarterly report from eBay Inc.

Banks had tumbled on Monday after Bank of America warned of further loan losses, only to jump back on Tuesday after Treasury Secretary Timothy Geithner told Congress that most banks were well-capitalized.

The jumpy trading in financial shares came just as major companies report first-quarter earnings. Results from AT&T, Boeing and McDonald's contained glimmers of hope about consumer spending and the economy in general.

"We're starting to see a little light at the end of the tunnel," said Frank Ingarra, co-portfolio manager at Hennessy Funds. "The challenge is I don't know how long the tunnel is."

The Dow fell 82.99, or 1 percent, to 7,886.57.

Broader market measures were mixed. The Standard & Poor's 500 index fell 6.53, or 0.8 percent, to 843.55, while the Nasdaq composite index rose 2.27, or 0.1 percent, to 1,646.12.

Anton Schutz, portfolio manager of Burnham Financial Industries Fund and Burnham Financial Services Fund, said with bank earnings mostly in hand investors are now focused on the results of the government's "stress tests," which are aimed at determining whether banks will need more government bailout money.

Schutz said the late slide in bank stocks Wednesday reflects fear over what those details might reveal about the industry. Results from the tests are due for release May 4.

Morgan Stanley fell $2.21, or 9 percent, to $22.44 after reporting it lost $578 million and reduced its dividend. The company said it was hurt in part by a deteriorating commercial real estate market.

Banks have largely dictated the stock market's direction since last fall, when the collapse of Lehman Brothers Holdings Inc. shocked the financial system. A string of better-than-expected results in recent weeks initially reassured investors that the industry was not as troubled as many feared, but Bank of America Corp. touched off worries again when it said it was expecting a sharp rise in levels of bad debt.

Analysts say it's crucial that banks become more stable and resume normal levels of lending in order for the economy to recover.

Bank of America fell 50 cents, or 5.7 percent, to $8.26 Wednesday.

Wells Fargo & Co., which bought Wachovia last fall at the height of the credit crisis, said it earned $2.38 billion. That compares with a profit of $2 billion a year earlier. Wells fell 63 cents, or 3.4 percent, to $18.18 after rising for much of the day.

Technology shares fared better.

EBay Inc. rose 49 cents, or 3.4 percent, to $14.78 ahead of its report, and then climbed another 8.6 percent in after-hours trading. The Internet auction company's earnings and revenue fell for the second quarter in a row due to the slumping economy, but they surpassed analysts' expectations.

Apple Inc. slipped 25 cents to close at $121.51 but rose 2.6 percent in after-hours trading after reporting a better-than-expected 15 percent rise in profit.

AT&T Inc., meanwhile, rose 46 cents to $25.74. It said strong results from its wireless business softened the effect of the weak economy and helped the country's biggest telecommunications carrier beat analyst estimates for the first quarter.

And Yahoo Inc. rose 10 cents to $14.48 after saying it would lay off nearly 700 workers. The Internet company's earnings fell 78 percent to $118 million for the first three months of the year.

In other trading, the Russell 2000 index of smaller companies rose 0.66, or 0.1 percent, to 470.71.

Rising stocks outpaced those that fell by about 8 to 7 on the New York Stock Exchange, where consolidated volume came to 7.15 billion shares, down slightly from 7.22 billion shares Tuesday.

Bond prices fell, sending the yield on the 10-year Treasury note up to 2.94 percent from 2.90 percent late Tuesday.

The dollar was mixed against other major currencies, while gold prices rose.

Overseas, Britain's FTSE 100 rose 1.1 percent, Germany's DAX index rose 2.1 percent, and France's CAC-40 rose 1.7 percent. Japan's Nikkei stock average rose 0.18 percent.

Texan dies of swine flu; Mexico ready for business

Mexico emerged from its swine flu isolation Tuesday as thousands of newspaper vendors, salesmen hawking trinkets and even panhandlers dropped their protective masks and joined the familiar din of traffic horns and blaring music on the streets of the capital.

There were still signs, however, of the virus that set off world health alarms. A Texas woman who lived near a popular border crossing was confirmed as the 28th person only the second outside Mexico and the first U.S. resident to die from the virus.

Across Mexico, people were eagerly anticipating this week's reopening of businesses, restaurants, schools and parks, after a claustrophobic five-day furlough.

"We have a lot of confidence nothing is going to happen," said Irineo Moreno Gonzales, 54, a security guard who Tuesday limited takeout customers to four at a time at a usually crowded downtown Starbucks. "Mexicans have the same spirit we've always had. We're ready to move forward."

The Texas woman, the second to die of swine flu in the U.S., lived not far from the Mexico border and had chronic medical conditions, as did the Mexico City toddler who died of swine flu last week during a visit to Houston, Texas, health officials said.

The 33-year-old woman was pregnant and delivered a healthy baby while hospitalized, said Leonel Lopez, Cameron County epidemiologist. She was a teacher in the Mercedes Independent School District, which announced it would close its schools until May 11.

Mexico's government imposed the shutdown to curb the flu's spread, especially in this metropolis of 20 million where the outbreak sickened the most people. Capital residents overwhelmingly complied, and officials cautiously hailed the drastic experiment as a success.

But by Tuesday, pedestrians many wearing protective masks, many not were back to dodging the familiar green-and-white VW taxis cruising for fares and noisy heavy trucks bearing bottled water.

Some officials worried about a sudden rush toward normalcy, though no Mexican swine flu deaths have been confirmed since April 29.

"The scientists are saying that we really need to evaluate more," said Dr. Ethel Palacios, the deputy director of the swine flu monitoring effort here. "In terms of how the virus is going to behave, we are keeping every possibility in mind. ... We can't make a prediction of what's going to happen."

Palacios acknowledged the enormous responsibilities that come with balancing the public's health and economic welfare.

"One of most the important things is that you need to know that these measures do have an impact not only on health but also on other aspect of life and society," Palacios said.

With 840 people sickened in Mexico at last count, public celebrations of Cinco de Mayo were banned, and politicians' homage to the soldiers who fought off the French 147 years ago were subdued.

For the first time in decades, Mexico canceled the popular re-enactment of its May 5, 1862, victory over invading French troops in the central state of Puebla. Another traditionally boisterous Cinco de Mayo party in Mexico City's central plaza, the Zocalo, will wait for another year, as will military ceremonies across the nation.

Cinco de Mayo celebrations generally attract bigger crowds in the U.S., where many Mexican-Americans gather to embrace their heritage. These crowds prompted concerns Tuesday about spreading the virus.

Denver's annual festival, which typically draws 400,000, will be held as planned this weekend, with hand sanitation stations installed at the urging of city health officials. Los Angeles won't skip its weekend celebration on historic Olvera Street. But in Chicago, the Mexican Civic Society of Illinois canceled its annual festivities because of flu concerns.

Swine flu has now sickened more than 1,600 people in 21 countries, including nearly 500 in the United States. The World Health Organization said it was shipping 2.4 million treatments of antiflu drugs to 72 countries "most in need," and France sent 100,000 doses of antiflu drugs worth $1.7 million to Mexico.

Mexican Finance Secretary Agustin Carstens unveiled plans Tuesday to stimulate key industries and fight foreign bans on Mexican pork products. He said persuading tourists to come back will be a top priority.

Carstens said the outbreak cost Mexico's economy at least $2.2 billion, and he announced a $1.3 billion stimulus package, mostly for tourism and small businesses, the sectors hardest hit by the epidemic. Mexico will temporarily reduce taxes for airlines and cruise ships and cut health insurance payments for small businesses.

U.N. Secretary-General Ban Ki-moon said he will ask governments to reverse trade and travel restrictions lacking a clear scientific basis.

About 20 Chinese businessmen and students, each wearing surgical masks, left Tijuana on Tuesday on a Chinese government flight after being stranded when China canceled all direct flights to Mexico.

Mexico, meanwhile, was collecting more than 70 Mexican nationals quarantined in China with its own charter flight.

Four U.S. citizens were quarantined in China, the U.S. Embassy in Beijing said Tuesday, and about 200 passengers who flew from the United Kingdom were under quarantine in a Brunei hospital after three of them arrived with fevers.

Mexico City recovered a bit of its ebullient self Tuesday, one day before the official reopening of stores, restaurants and factories. Only essential services like gas stations and supermarkets have been allowed to operate since April 27, and the weekend's professional soccer games will again be staged in empty stadiums.

High schools and universities were being scrubbed down to reopen Thursday. Younger children return to school on Monday.

Many people shunned their surgical masks Tuesday; a boy selling music CDs on a subway train planted a wet kiss on the unprotected cheek of a girl hawking tiny flashlights. A fruit salad vendor dished up slabs of freshly cut mango and coconut without mask and gloves.

The government is requiring businesses to keep a distance of 2 meters (yards) between customers to prevent the disease from spreading. The rule seemed unlikely to survive in the overcrowded capital.

"It's a little senseless, that people ride into town all jammed together on the subway, and the minute they enter a restaurant, they have to be 2 meters apart," said Nahum Navarette, manager of Yug, a vegetarian restaurant that was still serving only takeout on Tuesday, its dining room deserted.