(ORCL) Oracle and Hewlett-Packard Entangled in Lawsuit

Oracle Corp. (ORCL) has been sued by Hewlett-Packard Co. (HPQ) better known as HP, claiming breach of contract and anticompetitive behavior.

The legal suit was filed on the basis of a formal legal demand, which HP sent to Oracle on June 8, 2011, asking the latter to reverse its decision regarding the discontinuing support for the Itanium-based servers.

In the lawsuit filed at the state court in San Jose, California, HP has accused Oracle of contract breach related to the development of software for the Itanium-based HP servers. HP has also alleged that Oracle is persuading customers to replace their Itanium-based HP servers with Sun servers.

However, Oracle has denied the allegations and said that the formal agreement with HP does not include a guarantee of continued support for Itanium-based servers.

Oracle counter claimed that Itanium maker Intel Corp. (INTC) has been planning to phase out the product for sometime and HP is fully aware of this development. HP was the joint developer of the chip with Intel.

HP, through a jury trial, is seeking financial damages and an order prohibiting Oracle from pulling its support from Itanium computers.

Partners Turned Bitter Enemies

HP and Oracle had a long-standing partnership for almost 30 years, as there was very little overlap between the HP and Oracle products. Currently, HP and Oracle have more than 140,000 joint customers, with HP supporting more than 1 million Oracle software users, while 40% of Oracle software runs on HP hardware.

However, this all changed when Oracle bought the ailing Sun Microsystems for $7.3 billion in January 2010. The acquisition made Oracle a direct competitor of HP in the hardware segment.

Oracle has aggressively marketed Sun products by selling differentiated and high-value technologies as well as direct selling, which has started to make an impact on market leaders HP and International Business Machines Corp. (IBM).

The rivalry turned ugly when Oracle hired HP’s ousted Chief Executive Officer (CEO) Mark Hurd and offered him the position of the Co-President. HP condemned the move and filed a lawsuit claiming “irreparable damage” as it believed that Hurd would provide valuable trade secrets to Oracle to compete efficiently against HP. However, the lawsuit was mutually settled afterwards.

The relationship further soured when Oracle CEO Larry Ellison tried unsuccessfully to get HP’s new CEO Leo Apotheker to testify in the Oracle-SAP TomorrowNow copyright infringement trial. Mr. Apotheker was the former Chief Executive of German business software maker SAP AG (SAP), Oracle’s arch rival.

The two company’s rivalry once again came into the headlines when it was rumoured that HP will sign a massive customer relationship management (CRM) deal with Salesforce.com for about 35,000 to 40,000 seats, shutting down Oracle’s  Siebel subsequently.

Latest Development

The latest animosity in this saga is based on the usage of Intel’s Itanium chips. Itanium chips are available in two series Itanium 9300 and 9100. HP is the main user of Itanium chips in servers to run large corporate databases and other demanding computing tasks.

In March, Oracle announced that it will discontinue developing software for Intel’s Itanium chip, which powers HP’s line of Integrity servers, sighting that the processor is “nearing the end of its life”.

However, Intel denied any such plans and announced a couple of new Itanium chips, namely Paulson and Kittson, which are in development.

The analysts believe Oracle’s decision will hurt HP most, as the Itanium-based servers was a profitable segment for HP. Moreover, Oracle’s decision to discontinue its support will also force customers to buy new database licenses.

Our Take

We believe Oracle’s decision to stop developing software for Itanium-based servers, is a broad strategy of pushing Sun servers into the market, in order to gain market share going forward.

With the addition of servers, storage, SPARC processors, the Solaris operating system, Java and the MySQL database to Oracle’s portfolio of database, middleware and business applications, Oracle is well positioned to grow in the database market with the combined benefits of both the software and hardware infrastructure.

However, increasing bitterness between the two companies remains a concern. Moreover, a negative outcome from the lawsuit may hurt Oracle’s Sun expansion policies going forward.

We maintain our Outperform rating on Oracle over the long term (6-12 months). Currently, Oracle has a Zacks #2 Rating, which implies a Buy rating over the short term.

We remain Neutral on HP over the long term (6-12 months). Currently, HP has a Zacks #3 Rating, which implies a Hold rating over the short term.

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