Oracle edges out IBM to clinch $7.4bn deal with Sun Microsystems

The American IT giant Oracle has agreed to buy rival Sun Microsystems for $7.4bn (£5.1bn) just two weeks after Sun's talks with IBM fell apart. Oracle announced the $9.50 per share cash deal before the market opened in the US yesterday in a move that chief executive Larry Ellison promised would "transform the IT industry".

Sun's ownership had been in question since late-stage negotiations with IBM collapsed earlier this month.

IBM initially approached California-based Sun in March. After weeks of talks it cut its bid from $10 a share to $9.40, and Sun withdrew its exclusive negotiating status. The suitor promptly withdrew its bid on 6 April.

Sun's shares, which had closed at $6.69 on Friday, rose a third during trading yesterday morning to over $9 following the news. Scott McNealy, Sun's chairman, said the two companies had been "close partners for almost 20 years". He added: "This combination is a natural evolution of our relationship and will be an industry-defining event."

Philip Dawson, a research vice-president at the analyst Gartner, said: "This is a significant move as it marks two of the industry powerhouses of the past two decades getting together. It wasn't a surprise that Sun would be taken out, but it came from nowhere in terms of timing."

Mr Dawson added that after missing out on the deal, IBM will come under the most pressure from the newly expanded Oracle business.

The board of directors at Sun unanimously approved Oracle's offer, and the transaction should close this summer. Sun, primarily a hardware company that develops servers and data centres as well as applications and software for a range of businesses, was hugely successful during the dot.com boom. It owns the Java brand, and Oracle said the acquisition was "the most important software Oracle has ever acquired".

Yet, in recent years the group, named after the Stanford University Network built by students for an IT project, has come under pressure, especially in the current financial crisis. "As the whole market has struggled, people knew that Sun was up for grabs," Mr Dawson said.

Oracle is the world's largest enterprise software group, and provides technology to industries from banking to retail and utilities. The company estimated that Sun would bring an extra $1.5bn to the group's operating profit in its first year, rising to $2bn in the second. "This would make the Sun acquisition more profitable in per share contribution in the first year than we had planned for the acquisitions of BEA, PeopleSoft and Siebel combined," Oracle's president, Safra Catz, said.