Second, I estimated that Sun/Oracle will be able to reduce the cost of goods sold. I assumed that a 10 percent decline in "Cost of sales-products" would be doable as Sun/Oracle could squeeze their manufacturing suppliers. Next, I estimated a 10 percent decline in "Cost of sales-services." I assumed that Oracle would leverage its current maintenance and support teams to help curtail costs. However, since software accounts for less than 15 percent of Sun's revenues, one could argue that Oracle doesn't have the skills to provide the support and services to Sun's systems products. For perspective, Sun decreased its cost of products sold by 3 percent and its cost of services sold by 1.2 percent from fiscal 2007 to fiscal 2008. My estimates are significantly higher. However, Sun has been in cost cutting mode this year, and I expect Oracle to continue the effort.
Next, I assumed restructuring costs would remain flat at $570 million for the full year.
Now, let's consider Sun's R&D budget. Yes, Sun's software portfolio overlaps with Oracle's portfolio. The extreme argument is that Oracle will reduce the majority of Sun's software-related R&D. However, Sun's software revenue is estimated at less than 15 percent of overall revenue. So if R&D spending is aligned with revenue, a maximum of 15 percent of Sun's R&D would be at risk of being cut. I estimate a 20 percent reduction spread 5 to 10 percent in the software division and 10 to 15 percent in the hardware division.
The final operating expense category is "Selling, general & administrative."
If we use the above estimates, then the Sun "division" would report an approximate $800 million operating loss in its first year with Oracle. Since negative $800 million is not equal to $1.5 billion profit, Oracle will look for SG&A cost reduction from Sun.
A 63 percent reduction in SG&A:
Working backward with a $1.5B operating profit as the goal and the above assumption, I calculate that a 63 percent reduction in SG&A would be required. Wow. That is a big number, representing more than $2.3B in cost reductions. It's hard to imagine this large a reduction in just one year. Yes, there is overlap in SG&A functions between Sun and Oracle. But 60-odd percent overlap? I find that hard to believe. Maybe Oracle will reduce Sun's advertising budget, curtail JavaOne spending or CHQ-level roles like strategy teams. But these are minor elements of a multi-billion-dollar expense.