Here's the anomaly. Consider the following three-month trading chart:
You'd never think it but here are the facts:
- Google stock has been experiencing a number of non-disclosed acquisitions.
- Sun has had investors exiting to the tune of eight figures on a market cap of ten.
- Microsoft meanwhile, sits more comfortable than both at a price/earnings way below the industry average and with a product - Windows Vista - which everyone is talking about coming out later this year.
These kinds of anomalies are typical in the behaviour of companies where acquisitions have been strategically arranged and are still in the 'preparation' phase. Google has to do as much of a job in showing benefits of acquiring Sun as it does in proving its own capability to turn things around there - and what better way to do it than show the growth potential of the company it is preparing to acquire?
Anyone who thinks Google can continue its phenomenal growth without a platform to combine hardware, storage, StarOffice, JAVA, and Solaris ought to think again - the combinations are the only competitive advantage that can enable them to trade at a P/E of 100 - and perhaps way above. Indeed, this was exactly what happened in 2000: too many technology companies relied purely on supposed revenues derived from 'wandering customers', rather than delivering the hard substance that drove the bottom line exterior to trends of marketing and advertising. Sun's growth potential is what Google may well be looking to acquire - and that is largely stored in intellectual property, where Google hold their key competitive advantage: translating exactly this kind of property into cold cash.
My guess is that top brass at Google having been laying the groundwork for the cultural integration of the two companies without much concern for the price, which has probably already been hashed out.
As soon as Page and Brin steal this company, they'll have a business model set in place that the market can't argue with. Neither myself nor anyone I know owns any shares in Sun or Google, nor do I intend to buy any – I’m into analysis rather than speculation - but as for latter, I’d rate it a STRONG BUY right now.
Article comments
— go to most recent comments1 - Eric Olsen
this absolutely rocks Daniel - thanks and welcome!!
2 - Pseudonym
Google doesn't need Sun to make use of StarOffice (OpenOffice) or Java. Google knows more about how hardware and storage can satisfy their requirements than Sun ever will, and Solaris doesn't add anything that Google can't get elsewhere.
3 - Mike
I think you're absolutely correct. Sun has lately been acquiring Linux companies. This may be a bid to strengthen it's current standing in the OS market before the takeover by Google.
4 - Eric Berlin
Great piece Daniel, looking forward to much more !
5 - Dave D
Hmm, I wonder if that means that GoogleOS could be based on Nexenta (which is Ubuntu/Debian running on the Solaris kernel instead of Linux).
6 - NeiL
Wouldn't Google get more bang per buck in the desktop space by buying Novell, or even Linspire?
7 - .8 on myspace
this is good news 2 my googlitis
8 - Mr. Real Estate
I wouldn't be surprised if Google bought both Dell and Sun Microsystems. If they owned both and had a Google OS, they would then have the total product and be the PC version of a Mac.
-John Mudd
"Mr. Real Estate"
9 - Kevin Hutchinson
Sorry, but I disagree with most of what you've written. On your specific chart points:
1) If the GOOG buyers are not disclosed, how do you know? Seems they are being downgraded right now?
2) See
- value investors are buying SUNW
3) The Microsoft (MSFT) price has been static on missed product deadlines and poor MSN performance ...and company founders like Scott McNealy don't offload shares when they are about to be bought out.
Google's mission is to "organise the world's information". Sun's mission is to "solve complex network computing problems". So on the face of it they are a good match-up, and their corporate DNAs both share the anti-Microsoft gene.
But does Google want to own a smart hardware company any more than Oracle might? I think not. But, hell, if you're right I'll eat my hat! (Red Hat that is ;-)
PS I hold some SUNW shares
PPS See for my analysis
10 - svinsider
If Google buys Sun, the weight of a sinking ship will only drag Google down.
11 - Mike
And what, exactly, does Google get out of buying Sun? They can license Java, if necessary, at a price much lower than putting an albatross like Sun around its neck. Sun's hardware is barely competitive at this point. And I seriously doubt that Google wants Solaris.
So what does that leave?
12 - Alec
Sun's hardware is barely competitive? People fail to realize that when you want a 10tb database there are few vendors who can compete with Sun. I find our company which is globally aligned with Dell on the PC platform is trying to find a loophole to get Sun to replace their pc servers. Sun is closer then ever to having a platform at the right performance/price level for every level of computing (just keep in mind they expect a 50-60% discount on their list).
If Sun could get their act together on management tools I think they'd be back in the win column. The other thing that always is intriguing about Sun is if they reduced their R&D the slightest bit they'd show a profit... They just don't feel a need to show a profit...
13 - Mr. Real Estate
Google's success is because of text ads and a formula that allows them to greatly capitalize from the text ads. See here for details. Text ads can make anything profitable if it receives enough traffic, or users, and besides, Google would likely be unable to create an OS without Sun's technology. MP3 players were losers until Apple created the iPod, and while it's not an MP3 player, technically, all they did is take the MP3 player concept and made it a little bit better. iPods have trouble staying on the shelves. Google would likely have a very similar effect on Sun Microsystems if it were to move forward with an acquisition.
-John Mudd
"Mr. Real Estate"
14 - Christopher Rose
Of course, Google's search algorithm is the real source of their success, John.
Er, that link seems to be broken...
15 - Frank
Okay,so who do I invest in - SUN or GOOGLE?? Which one will make out in this potential acquisition?
PS - Article!
16 - Daniel M. Harrison
Well, this piece is really gaining momentum. My advice?
ST: Sell Google, buy Sun.
LT: Once the takeover is through - if it happens - buy back the stock.
17 - David
interesting story!!! what could be the Sun share price if there is the takeover? Is there any other updates on this story ?
18 - Brian Sorrell
Very interesting prediction.
I agree with some of the above -- that Sun's machines are solid -- but their interface and management tools are weaker than others. Maybe, if you're right, Google is banking on putting their interface skills to work with Solaris?? That might help prop up Solaris' share of the server market and maybe even put them back on the desktop.
19 - Michael_tx
Oh, it's a bomb!!! The arguments of the article sounds realistic. Is there any other comments form the author?
20 - alex
"NEW YORK, March 2 (Reuters) - Web search leader Google Inc. aims to become a $100 billion company and plans to put computer systems and other investments in place to help reach that scale during 2006, executives said on Thursday."
"I'll leave it to you to judge whether that is $100 billion in market capitalization or revenue," Google Chief Executive Eric Schmidt coyly said as he outlined his 2006 priorities to Wall Street analysts at the annual Google Analyst Day meeting.
I am really intrigued by this, everybody know that Google has already around $116 billion in market capitalization and their gross revenue last year was $6.14 billion, so if I am not wrong they must increase their revenue of $93.86 billion for this year, it's huge. How he can do that? Buying sun to increse revenue as the article has predicted ?
21 - Frank Gruber
I think you are right on with your prediction Daniel. I think Google has been courting Sun since they teamed up last fall (October 2005). With Google looking to run everything online (GDrive, Calendar, Writely, GMail, etc.) they may need to servers and processing power and what better way to get it than to buy Sun.
22 - John smith
The in depth analysis is good to understand and
thought provoking. But, in it's shape Google
does not seem like need a h/w company. As per recent
comments by Eric, Google want to provide/use Internet as a channel of biz. to reach end users and
there by making internet as a vehicle to sell things.
23 - Jeff Venters
The last thing Google needs is Sun. I'm amazed at foolish ideas proposed by people outside the computer industry such as this. Google is still an innovative, fast moving, young company that is not weighed down by a stodgy bureaucracy such as Sun. An acquisition such as this would distract Google management for at least a year. It’s likely the drag effect on management would go on for at least two years. Lets all hope Eric is smarter than this. The future lies in web-based Client-Server technologies such as AJAX. That includes the ability to provide desktop application functionality that only requires a browser to utilize (i.e., no Microsoft Office) and is tightly integrated with all of Google’s framework is what Google needs to focus on. Once this is accomplished Google should productize it for the Enterprise. This would run best on X86-based based COMMODITY server hardware and possibly on Linux. Sun doesn't fit this model nor would its price or customer base.
24 - jfb2002
This is gibberish. Google uses no Sun products; Google has no need for Sun products; Google doesn't want to sell corporate support contracts to run giant Oracle instances, which is all that Sun does anymore.
More to the point, Sun is dying. What do they have that an internet ad sales company would want? Their patent portfolio is mostly tied up in slow in-order processors and giant NFS boxes, neither of which is remotely interesting to a company that uses commodity hardware and a hand-rolled high-speed network layer.
25 - Kenneth Martin
Sun just spent a 4 Bilion to aquire StorageTek, one of the leaders in worlwide storage. But, Sun just kill the customer expectations in storage, changing products and solutions from a very good structured company as StorageTek was. Now StorageTek is only a brand with lot of Sun´s well know operational problems. I think Mr. McNelly will have to explain to world why they spent bunchs of money from investidors to aquire StorageTek with no sucessfull result. Maybe the explanation will be done by Google in future.