PARAPHRASING

Case 48: Sun Microsystems

Done by: Nour Abdulaziz

Maryam Barifah

Shrouq Al-Jaadi

Balqees Mekhalfi

Yara El-Feki

Introduction

•In 2009, Oracle was planning to acquire Sun Microsystems.

•This acquisition would allow Oracle;

•to further diversify their brand, customers and acquire various new platforms that would be added to their portfolio such as MySQL, Solaris and Java.

•Oracle originally placed an offer of $9.50 per share price which is considerably higher than Sun Microsystem’s price that is $6.69.

•This will cut the production costs and make the company more efficient throughout all the value chain.

•Oracle aimed to capitalize on Sun Microsystem’s decline by getting particular assets or the whole company at the deflated price.

Is Sun Microsystems a good strategic fit for Oracle? Should Oracle acquire Sun Microsystems?

- as it will allow them to achieve their vision of becoming the Apple of the software industry.

- it will allow the company to deliver high-quality customer products by combining both hardware and software components, hence reducing the consumer setup process.

Continue

It will provide Oracle with the needed expansion.

-This acquisition fits Oracle’s overall strategy which is to improve through acquiring and effectively integrating other companies

Worth of Sun Microsystems and Valuation Approaches

To know how much Sun Microsystems worth, we must find the Stand Alone Value of the company.

The Stand Alone value represents the present value of Sun Microsystem individually before factoring the synergy that would be created when Oracle acquires Sun.

Another method is the value of Sun Microsystem with synergies, which after being acquired by Oracle, must be found. This is done to see whether or not the acquisition was a proper strategic decision or not

Another method of valuing the Sun Microsystem is through the comparative company analysis (CCA). That is done through the thorough assessment of rival and peer businesses of similar size and industry.

Finally, the acquisition price, which is the price that is paid to the target when it is first acquired, is also used as a separate method of valuation. The value of the acquisition price ranges between the values of the stand-alone and the synergies.

USING THE DCF

To be able to find the values of both, the Stand Alone and the synergies, we have decided the best way to do so is by calculating the discounted cash flow (DCF) by using the multiples and the perpetuity growth methods and finding the average of both.

USING THE WACC

The weighted average cost of capital (WACC) is the average of the cost of individual sources of capital. The capital is comprised of equity that has been invested, or simply debt that lenders decided to invest in; with each source of equity being proportionally weighted.

WACC can be defined as the minimum rate of return. Companies must generate returns greater than their WACC to be above the break-even point. In case a company goes below, they would enter a deficit.

The formula: WACC = Wd x Rd x (1-T) + We x Re

Wd= weight of debt (Debt/(Debt + Market Capitalization))

Rd= cost of debt

We= weight of equity (1-Wd or 1-%Debt)

Re= cost of equity (Using CAPM) = Rf + Beta x (Rm).

T= tax rate = 35%

Providing us with a WACC of 12.05%.

Comparable Companies Analysis (CCA)

The analysis will be based on the following companies. Apple, Dell, Hewlett-Packard (HP), Intel and International Business Machines (IBM).

In Exhibit 9 the levered beta of comparable companies are given, reflecting an industry’s median 1.12 and a levered beta of Sun Microsystems of 1.73

Calculated the debt to equity (D/E) ratio to get the unlevered beta, using a tax rate of 35% as assumed in question 2, showcasing an industry median of 9.35% and an industry’s unlevered beta of 1.58, while Sun Microsystems’ (D/E) ratio is 25.44% and its unlevered beta is 2.13

Calculated the cost of equity using capital market structure[1] using the risk free rate of 2.82% and market premium of 6%

The WACC was calculated to conclude an industry’s median of 9.50% against Sun Microsystem’s that is of 12.05%

This indicates that investing in the company is much riskier compared to its rivals in the same industry.

Multiples of the Comparable Companies

Incorporated the averages of these multiples to calculate the firm’s implied enterprise value.

Used the average of the EBIT, EBITDA, and Sales for the comparable companies analysis (for the years 2007 and 2008).

We reached an average share price of $13.06

Economic fundamentals reflected in the multiples

We used the 10 years U.S. treasury bills yield as risk-free rate used as growth rate.

When calculating the average share price, our implied enterprise value was calculated based on the average of the multiples.

There could be a miscalculation of the actual worth of the firm because some of the companies are much more financially stable in comparison to Sun Microsystems such as Apple and Dell.

Stand-Alone Sensitivity Analysis: