Analysis The sage analysts at Merrill Lynch are at it again. This time, they're demanding that Sun Microsystems acquire either Red Hat or Novell. Without such a buy, Sun will never be taken seriously in the Linux server market, and with Red Hat or Novell on its side, Sun could really take the Opteron server market by storm, they argue.
Some of you may already be scratching your heads. Sun sells both Red Hat and Novell to customers who ask for it today. Sun CEO Scott McNealy wore a penguin suit, right?
You're probably scratching your head even harder wondering why Merrill Lynch is talking about the impact that acquiring Red Hat may or may not have on Sun. What the analyst firm presents as "just another deal" would be seen as a nuclear act by much of the rest of the IT industry, which relies on the neutrality of Red Hat and Novell. Any acquisition would destroy the Linux vendors' apparent goodwill. Merrill, however, was intent on ignoring the bigger picture and zeroed in right on what this IT shocker would mean to Sun.
Acknowledging Linux isn't enough for Sun, according to the analysts. Sun spends too much time touting Solaris x86 as the right option on x86 servers. It needs to realize that the Solaris x86 message will only play well with Sun's existing customer base, and that others will be put off by Sun's refusal to go all out with Linux, according to Merrill Lynch.
"We're arguing that Sun's strategy must transform from the initial aversion to Linux to the current tolerance of Linux (but preference for Solaris) to an aggressive pro-Linux stance," Merrill Lynch said in a recent report. "Although there are self-cannibalization risks, we figure they are inevitable and that it is better for Sun to be on the offensive. If Linux is Unix, then Sun should dominate Linux; that, in our view, should have been the company's position from the start."
"We believe Sun's biggest problem is perception. Sun was hot, now it's not. In our opinion, it will take a radical move to change customers' views. Sun needs to own Linux, both figuratively and literally."
Merrill Lynch reports are loved in these parts for their whimsical tone. It's not often that you see one of the most respected financial firms use turns of phrase like, "Sun was hot, now it's not." How many MBAs does it take to come up with that?
Sun's biggest problem is of course not perception but reality. Financial services firms, telcos and service providers awarded Sun with billions upon billions during the dotcom boom. Then vast sums of this money dried up, as companies went out of business or pulled back on their spending. This created a huge gray market for Sun gear that haunts the company to this day. Add to this increased interest in Linux and x86 servers, better Unix kit from IBM, some internal missteps such as Sun's reluctance to sell Lintel gear, and you have the heart of Sun's woes.
Sun most certainly benefitted from the "perception" that it made the best Unix servers around, during the dotcom boom. (Although this again was probably less a perception than a reality.) Analysts at firms such as Merrill Lynch issued unreal projections for Sun's shares and demanded that Sun be more optimistic about its ability to meet their unreal goals. If Sun is suffering from perception inadequacy, it's probably Merrill Lynch's fault.
But let's put whimsy to the side for a moment.
Red Hat is the way to go
It seems unlikely that IBM would allow Sun to buy Novell. Big Blue has put too much investment into both SuSE and Novell to see one of its fiercest rivals own the second most popular version of Linux. Stranger things have happened, but the Magic 8-ball, says, "Don't count on it."
If Sun were to take a risk on a Linux vendor, Red Hat would be the more obvious choice. There's no sense in picking up the Tier II vendor, when your $7bn in the bank makes the Tier I player a possibility. Red Hat would deliver HP and Dell to Sun right off the bat. Worry about IBM later.
Merrill Lynch cites shock value as one of the main reasons for Sun to make a Linux acquisition. Those customers and developers that doubt Sun's Linux love would simply have to get over their concerns - fast. Again, Red Hat is the more effective buy with this rationale as well. Sun could purchase Novell and still be ignored, but Red Hat customers would be forced to deal with Sun even if it was only to hold the fort while they devised an exit strategy.
Merrill Lynch also points out the obvious gains Sun would see by more actively participating in a growth market. Unix sales are declining slowly for all vendors. Why not eat some of your Solaris share today to feast on the robust Linux market later?
There are, however, some more gains Sun could see that Merrill Lynch ignores.
First off, Sun knows how to run a successful operating system franchise. Sun's Solaris engineering team produces a steady stream of innovation.Solaris is a secure, scalable, and, with Solaris 10, fast operating system with plenty of of ISV support. Sun knows how to pull off the end goal of making a true datacenter-ready operating system, while Red Hat is still learning how to move past web and application servers. Sun could well endear itself to the Linux developer community in a major way by helping guide the OS more quickly toward handling high-end tasks.
Secondly, and this is a stretch, Sun's purchase of a Red Hat or Novell could actually open up conversations around Solaris x86. Dell, HP and IBM would be forced to talk to Sun. These three rivals harbor a type of visceral hatred for Sun that seems to go back to its unfair gains made during the dotcom boom, and goaded by McNealy's relentless bashing. They all rely on Linux though, and would certainly be more open to a Sun with Red Hat on its side.
Sun just might be able to use its Linux leverage to push Solaris x86 discussions along. "Why not offer our whole operating system suite on your servers? We'll do all the work. We're all in this together now." (Incidentally, one of the more amusing bits of a Sun/Red Hat acquisition would be seeing the capitalist McNealy earn his $100,000 a year salary, while the already grossly overpaid socialist Red Hat brass pulled in their millions per year. Not that anyone is feeling sorry for Scott, but still.)
Ultimately, however, Merrill Lynch's latest musings will no doubt end up in the trash can made specifically for them by Sun years ago. At Sun, this is known formally as the "Loony Tunes Receptacle."