Oracle Corporation (hereinafter referred to as “Oracle”) and Sun Microsystems (hereinafter referred to as “Sun”) announced, on April 20th, 2009 , they have entered into a definitive agreement under which Oracle will acquire Sun common stock for $9.50 per share in cash. The transaction is valued at approximately $7.4 billion, or $5.6 billion net of Sun’s cash and debt. “The acquisition of Sun transforms the IT industry, combining best-in-class enterprise software and mission-critical computing systems,” said Oracle CEO Larry Ellison. “Oracle will be the only company that can engineer an integrated system – applications to disk – where all the pieces fit and work together so customers do not have to do it themselves. Our customers benefit as their systems integration costs go down while system performance, reliability and security go up.” There are substantial long-term strategic customer advantages to Oracle owning two key Sun software assets: Java and Solaris. Java is one of the computer industry’s best-known brands and most widely deployed technologies, and it is the most important software Oracle has ever acquired. Oracle Fusion Middleware, Oracle’s fastest growing business, is built on top of Sun’s Java language and software. Oracle can now ensure continued innovation and investment in Java technology for the benefit of customers and the Java community.

Merger Control in the European Union

Merger control authority in Europe is divided between the EC and the EU Member States. This short paper identifies which transactions are covered by the ECMR, under the assumption that Oracle’s proposed acquisition of Sun falls within the scope of application of the ECMR. In addition, the substantive analysis of a merger by DG COMP and the Courts will be briefly summarized.

A “concentration” of a “community dimension” falls within the EC’s exclusive jurisdiction; EU Member States may not apply their merger regimes to such transactions, ECMR, Art. 21(3.), except where the EC refers such a transaction to Member State authorities under ECMR Art. 9.

The substantive analysis of an EC merger case begins with definition of “affected” markets, that is the relevant product and geographic markets. It proceeds to an assessment of the possible competitive effects in the affected markets as well as countervailing factors, and, with the parties’ cooperation, determines whether agreement can be reached within the decision deadlines on undertakings that would remedy anticompetitive effects.

Is Oracle’s Proposed Acquisition of Sun likely to be cleared by DG COMP?

According to several reports over the last few days, Oracle and Sun plan to file a merger notification with DG COMP on an undetermined day this month. We assume that the companies are currently involved in pre-notification consultations with DG COMP in order to prepare a subsequent formal merger notification. In any event, there is no publication of such formal merger notification in the Official Journal as of July 17th, 2009.

The next step should be a formal merger notification with DG COMP triggering a Phase I investigation procedure. Depending on the outcome of the Phase I investigation procedure, the proposed merger could be either (i) cleared unconditionally, or (ii) cleared conditionally (the notifying parties could offer remedies, whether structural or behavioural, so as to eliminate any potential competition concerns) or (iii) Phase II investigation procedure could be initiated if the proposed merger raises serious competition concerns.

We take the view that the proposed merger should be cleared by DG COMP. That being said, one cannot rule out the possibility of some sort of remedies, whether structural or behavioural, since DG COMP has signaled that it intends to look carefully at vertical foreclosure issues in mergers. In this connection, according to a recent statement issued by Oracle’s attorney Dan Wall[1], US regulators have asked for more information specifically about the licensing of Sun's Java software. The interest in the so-called "vertical integration" issues related to Sun's Java, which has been melded into the technologies of a number of Oracle’s competitors, would be unsurprising. In this regard, as noted above, vertical integration issues are also carefully scrutinized by DG COMP in order to avoid foreclosure of competitors and, ultimately, exploitation of consumers. It is our understanding that similar competition concerns could be raised by DG COMP.

In order to ascertain the likelihood of such vertical foreclosure, DG COMP will consider the following questions:

• Does the merged entity have the ability to foreclose its competitors?
• Does the merged entity have the incentive (i.e., profitability of such foreclosure) to foreclose its competitors?
• What is the effect on competition in the market?
   

Should competition concerns be identified by DG COMP, the notifying parties could offer commitments so as to remedy these competition concerns.

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[1] http://www.marketwatch.com/story/oracle-sun-merger-gets-closer-antitrust-scrutiny consulted on July 15th, 2009.