Sun Microsystems, Inc. (JAVA) said that Oracle Corporation’s (ORCL) acquisition of the company had been approved by the European Commission.

While struggling to generate profit, its results not showing any spark and continuing to be hit hard by the recession, Sun Microsystems, Inc. announced it’s acquisition by Oracle Corporation for $9.50 per share in cash in 2009. The transaction is valued at approximately $7.4 billion, or $5.6 billion net of Sun’s cash and debt. We believe Sun is pursuing the right strategy to return cash to shareholders.

While the shareholders, the U.S. Department of Justice and recently, the European Commission have given their consent, the acquisition is pending approval from China and Russia regulators. Both the companies expect unconditional approval from China and Russia and intend to close the transaction soon. Oracle will host an event on January 27th, 2010 to discuss the acquisition.

The acquisition is essential for Sun to compete in the high-end server market against large players such as International Business Machines (IBM), Microsoft Corp. (MSFT) and Sybase, Inc. (SY). Further, the acquisition will revitalize the Sparc and the Solaris operating systems and strengthen the Java development platform.

Sun Microsystems has announced several cost cutting measures over the past few quarters. However, the company has been witnessing poor operating performance due to the tepid economic environment and revenues have shown a sharper decline than operating expenses, resulting in lower margins.

While restructuring initiatives are encouraging, Sun’s competitive position has been compromised, and it is losing market share to IBM and Hewlett-Packard (HPQ) in the server market and to EMC Corp. (EMC) in the storage business.

Sun’s effort in trying to control its operating expenses during the current global economic turmoil, may limit its ability to maintain its competitive position and meet operational challenges, which could in turn affect the company’s business and financial results adversely. Further, uncertainty regarding the future of Sun’s hardware business may lead to lower service revenues. Although technology spending is rebounding, continued weakness in the network computing industry, a slow U.S. economy and slower demand could harm Sun’s business.

Currently, the stock is trading on the takeover expectation rather than its own fundamentals. Thus we remain Neutral on the stock and set a price target of $9.50, close to the acquisition price.

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