As Oracle (NASDAQ: ORCL) held its annual meeting this week, CEO Larry Ellison said: “You’re going to see us buying chip companies.”  He added that now that Oracle is in the hardware business through its acquisition of Sun Microsystems, he wants to follow the model of his friend and Apple CEO Steve Jobs to own more of the intellectual property in the computer chips Oracle will be using.

Wall Street immediately named ARM Holdings (NASDAQ: ARMH), Advanced Micro Devices (NYSE: AMD), Nvidia (NASDAQ: NVDA), and the semiconductor division of IBM (NYSE: IBM) as potential acquisition targets.  None of those make any sense.

I have been following Oracle since their initial public offering in March 1986.  Larry Ellison has always believed in the big central server/thin client computer model, because his database software runs best on a big central server.  Now that the world is going his way with cloud computing – big central servers and data storage, with clients as small as a smartphone – he bought Sun to be able to offer the central server hardware to Oracle’s database clients.  Sun has long designed its own very fast SPARC server processors, as well as offering industry-standard Intel and AMD processors as an option.  Ellison has already said he intends to invest heavily in SPARC.  So you can forget an AMD acquisition; Ellison has better things to do than compete with Intel.

You also can forget an acquisition of IBM’s semiconductor division.  Ellison does not need to spend billions of dollars on equipment to manufacture chips when he can leverage the fabless model by using contract manufacturers like Taiwan Semiconductor (NYSE: TSM), United Microelectronics (NYSE: UMC) and Chartered Semiconductor to do it for him.

One of the key hardware products Ellison got in the Sun acquisition was their thin-client SunRay products that substitute for a desktop or laptop computer.  The processor in these was designed by MIPS Technologies (NASDAQ: MIPS) and is built by RMI, a company that was acquired by NetLogic Microsystems (NASDAQ: NETL).  There are other sources for these enterprise-class processors.

In a recent issue of New World Investor, I said that there is a small possibility that Oracle would buy Research in Motion (NASDAQ: RIMM) because their Blackberry is widely used in enterprises, and could be leveraged into a line of thin-client products.   I suppose Oracle could buy MIPS if they want to own the intellectual property underlying the SunRay processors.  But buying ARM Holdings, which makes lower-powered processors for consumer devices like smartphones, makes no sense at all.

Finally, Nvidia makes wonderful high-end graphics processors, but a thin-client requires only a simple processor to render the data coming from the server.  Sorry, Nvidia is off the list, too.

So what semiconductor companies might Oracle actually buy, other than the long shot of buying MIPS?  InfiniBand is a switched fabric communications link used in high-performance computing and enterprise data centers – the center of the cloud where Sun’s servers live. It offers very high throughput with low latency, and – very important for the cloud – is designed to be easily scalable.  Oracle/Sun use InfiniBand.

Two leading semiconductor companies with InfiniBand technology and products are QLogic (NASDAQ: QLGC) with a total market capitalization of $1.9 billion and no debt, and Mellanox Technologies (NASDAQ: MLNX) with a total market capitalization of $670 million and $316 million in long-term debt.  Either one is just an appetizer for Oracle, but each brings semiconductor intellectual property to the table that Oracle can actually use, in contrast to the names Wall Street is floating.  Heck, knowing Larry, he’ll probably buy them both.

Michael Murphy and his New World Investor subscribers took profits in NetLogic Microsystems earlier this year, and does not hold or recommend any of the other stocks mentioned.  Read more about Michael and his strategy at NewWorldInvestor.com.

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