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This case was prepared by Eric Varney (MBA ’10) and Assistant Professor of Business Administration Elena Loutskina. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2010 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
Sun Microsystems
Oracle will be the only company that can engineer an integrated system-application to disk—where all the pieces fit together so the customers do not have to do it themselves…Our customers benefit as their systems integration costs go down while system performance, reliability and security go up.
—Larry Ellison, CEO, Oracle Corporation1
It was the first time in the last two weeks that Margaret Madison, a member of Oracle’s corporate development team, had not stayed in the office until two in the morning. At the close of business earlier that day, Friday, April 17, 2009, Oracle had put in an offer of $7.38 billion, or $9.50 per share, to acquire Sun Microsystems. Only nine months into her position, Madison, a recent MBA graduate, had found herself to be a member of Oracle’s valuation team, assessing a potential merger with Sun. The journey, however, was not over yet. Sun had a number of potential suitors, IBM standing prominently among them, and Madison and her colleagues expected IBM to counter Oracle’s offer.
Oracle, a California-based business software company, was one of the world’s largest and most reputable sellers of database management systems and other related software. With $23.6 billion in annual revenue, the company was a leviathan, led forward with lightning speed by the only CEO Oracle had ever had, Larry Ellison. Sun was nothing to scoff at either. Once the darling of Silicon Valley, it had fallen on tough times but was still competitive. Sun had started as a hardware and servers producer, but over the years, it had established a solid position in the software industry with its Java programming language, Solaris operating system, and MySQL database management software. Combining these two companies had the potential to create the Wal-Mart of the enterprise software industry. Ellison “had a vision for creating an end-to-end vendor [that] clients go to for all their technology” needs.2
Oracle’s bid of $9.50 per share was more than a 40% premium over Sun’s $6.69 closing price that day. But only a few weeks prior, IBM—Oracle’s chief rival in the $15 billion database software business—had offered $9.40 per share for Sun. The talks had stalled due to antitrust concerns, employment contracts, and the final price, which opened a window of opportunity for Oracle to step in and ensure that Sun did not fall into a competitor’s hands.
1 “Oracle Buys Sun,” Oracle Corporation press release, April 20, 2009. 2 Jerry Hirsch and Alex Pham, “With IBM Out, Oracle Jumps in to Buy Sun for $7.4 Billion,” Los Angeles Times, April 21, 2009.
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Oracle had been on a successful shopping spree over the past several years. The ability to acquire 10% margin companies and turn them into 40% margin companies had distinguished Ellison and his team as ruthless cost-cutters who planned ahead well before making purchases. As a member of the corporate development team, Madison knew that better than anyone else. She had spent the last few weeks carefully poring over every part of Sun’s financials, business lines, R&D figures, and personnel expenditures. Today was a break from the 20-hour work days, the sight of empty Chinese food cartons, documents strewn across the table, and weary-eyed bankers. Today had been a better day, but only delivered brief respite to the team. All the questions they had worked on so diligently still remained. Had they considered everything? Was the final offer appropriate? If competitors upped their bids, how much more could Oracle offer?
Competitive Landscape
The technology industry had historically comprised three sectors: hardware, software and services, and storage and peripherals. In 2008, revenue generated by these three segments was $411 billion,3 $2,239 billion,4 and $160 billion,5 respectively. In total, the value of the industry was roughly $2.8 trillion, or about one-fifth of U.S. GDP.
The computer hardware market consisted of personal computers (PCs) (roughly half of sales), servers, mainframes, and workstations (Exhibit 1). Although customer loyalty was relatively low, brand awareness was high, which somewhat restricted new entry into the market. Business customers were typically tied to specific hardware manufacturers through long-term contracts, which led to significant switching costs. Individuals were less fettered and had minimal switching costs, but only represented a small percentage of the market. Computer hardware was a necessity for individuals and businesses alike, making demand strong and consistent.6 With weak rivalry among players, the market had enjoyed a healthy 4.8% growth over the previous few years and was expected to grow at the same pace until 2013.
The software and services segment was the largest part of the IT industry. The industry was peppered with thousands of competitors large and small, young and mature, fun and serious. It offered a wide array of products ranging from heavyweight software, such as Microsoft Windows, to small applications; services also ran the gamut, ranging from large-scale consulting products to small projects, such as website development and design for local businesses. Some competitors had a large Internet presence (e.g., Google or YouTube), whereas other niche players operated small tools, such as online surveys (Exhibit 2). Only the heavyweights enjoyed some customer loyalty. Major software and services providers—Microsoft, IBM, HP, and Oracle— had stable and rather predictable revenues and notable market share (Exhibit 3). This software and services segment outpaced the hardware and storage and peripherals segments, growing at 12.2% annually between 2004 and 2008, and it was expected to maintain a healthy annual growth rate of 10.4% until 2013.7
The smallest segment—computer storage and peripherals—included data storage components, computer processors, and other peripherals (e.g., printers). The market was dominated by storage devices, such as hard
3 Datamonitor, “Global Computer Hardware: Industry Profile,” December 2008. 4 Datamonitor, “Global Software & Services: Industry Profile,” March 2009. 5 Datamonitor, “Global Computer Storage & Peripherals: Industry Profile,” March 2009. 6 Major producers of computer hardware included Dell, Hewlett-Packard (HP), Sun, IBM, and Apple. Some (e.g., Dell and HP) were fairly
diversified and offered a swath of hardware products. Others (e.g., Sun and IBM) marketed their products almost exclusively to business customers. Apple was unique because it dealt mainly with retail customers.
7 “Global Software & Services: Industry Profile,” March 2009.
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drives. Combined, HP, Toshiba, and IBM commanded about half of the market. Historic sales growth rates of storage and peripherals mirrored that of the computer hardware segment.
In the 1990s, the IT industry resembled a tiered cake, with one or two heavyweights controlling each tier. These tiers were essentially technology swim lanes with little competition from other firms. For example, Cisco controlled the networking hardware market; Sun and HP were known for manufacturing servers. The business software segment belonged to SAP, while Oracle led in databases. IBM, a longtime hardware company, had moved into consulting and services. Everyone knew that HP laptops ran Windows operating systems but used Toshiba hard drives. Commercial clients bought Sun servers and ran Oracle database management software. There was relatively little overlap between these rival giants.8
At the dawn of the new millennium, the industry started to change. Lines between segments were becoming blurred; former allies encroached on each other’s turf, and customers were forced to deal with fewer suppliers. The success of Apple’s concept of a one-stop shop for consumers to acquire hardware, software, and even peripherals with a tightly controlled distribution channel forced large technology companies to reconsider their strategic approaches to business development. “The maturing tech industry has set giant companies on a collision course, as once-disparate technologies take on new capabilities in a ‘convergence’ of computers, software and networking.”9 Companies such as Apple and Dell moved away from PC manufacturing to other consumer devices, such as mobile phones, printers, and cameras. By the end of 2008, Apple, a long-standing competitor in the PC segment, derived only one-third of its total revenue from computers and laptops.10 But simple deviation from historical products was a drop in the bucket. Battles were breaking out all across the industry. In 2009, Cisco, a manufacturer of networking hardware, announced it would start building its own servers, thus stepping into the territory of its longtime ally HP, which dominated the server market. HP itself took aggressive steps to compete with IBM in the technological outsourcing segment by acquiring Electronic Data Systems in 2008. Microsoft attempted to take over Yahoo, thereby eyeing Google’s domain. Dell was rumored to be in the final stages of developing a “data-center management software that [would] compete with existing offerings by HP, IBM and others.”11 Oracle was on a long-term shopping spree expanding from database management software to an array of products. (See Exhibit 4 for company descriptions and Exhibit 5 for sales growth.)
“In the past, when big tech companies crossed over into others’ businesses, they often dismissed it as ‘co- opetition,’ meaning they planned to compete in some areas and cooperate in others.”12 With healthy growth of the technology industry and consumer hunger for new gadgets, there was plenty of revenue to go around. But the financial crisis, beginning in 2007, changed the landscape. The looming recession shrunk sales all across the industry and forced technology companies to explore every opportunity for extra revenue.
8 “Mr. Ellison Helps Himself,” Economist, April 23, 2009. 9 Ben Worthen and Justin Scheck, “As Growth Slows, Ex-Allies Square Off in a Tech Turf War,” Wall Street Journal, March 16, 2009, A1 10 Apple, Inc., annual report, 2008. 11 Worthen and Scheck. 12 Worthen and Scheck.
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Oracle
In 1977, Larry Ellison, Bob Miner, and Ed Oates, three twentysomething software engineers, left Ampex Inc. to start a new venture, Software Development Laboratories.13 Ellison became the head of the fledgling firm. Within a year, the team had designed the first relational database management system (RDBMS) under the code name “Oracle.” Early adopters of the technology included government, military, and intelligence entities (including the U.S. Central Intelligence Agency) and innovative businesses, such as Bell Telephone Laboratories. The original product and all the following versions of Oracle capitalized heavily on the revolution of electronic record keeping that hit U.S. corporations in the 1970s. By 2009, all large U.S. corporations without exception were using database management products in every aspect of their business: back office, front office, client relationships, Internet, and so on. Every set of records that companies kept required a database server and an application that would search through data quickly and efficiently providing managers with information on demand. Both the software for keeping the data in an easily accessible format and the tools to speedily search through that data were Oracle’s bread and butter. Every heartbeat of a corporation, every step it took involved a database management system: payroll, sales, supply chain decisions, and travel reimbursements, to name a few.
Oracle’s relationships with clients did not stop at merely developing and distributing the RDBMS software. The company provided continued support to its clients through constant improvements in its software, customized customer support and training, and on-site installation and tune-up of the applications to a particular client’s needs. Oracle targeted high-end customers because it had a lot to offer them. Apart from being the best among competitors in data access speed, Oracle also provided best-in-class data security protection. Its early versions could be installed and used on any type of computer, running any operating system. This was a revolutionary move that catapulted Oracle’s sales early on.
Oracle went public in 1986 on the NASDAQ. Although its journey had not been smooth at all times, Ellison had always managed to turn the company around. He had a vision to create a company that would dominate the “desktop of business users” market. As early as the 1980s, Oracle had aimed to create customized applications for business users built upon the core product: Oracle RMDBS. Over time, the company had gained significant presence in developing applications for supply chain management, manufacturing, financials, project systems, market management, and human resources, which were highly popular among Oracle’s customers.14
By 2000, Oracle sales had topped $10 billion. Despite a dip in sales during the dot-com bubble, Oracle had remained highly profitable. For a brief period, Ellison was the wealthiest man in the world. Oracle’s success continued into the new millennium. Between 2000 and 2005, the top line grew annually at 2.9%, operating profit increased at 5.5%, and the margin improved by nearly 400 basis points. These healthy profits led to a significant accumulation of cash, which in turn allowed Oracle, under Ellison’s leadership, to become a serial acquirer.
Since 2005, Oracle had spent more than $30 billion on over 50 bolt-on acquisitions (see Exhibit 6 for select transactions), only a few of which were intended to refine and innovate Oracle’s core database product line. Other acquisitions had allowed Oracle to aggressively move into new areas that would complement its
13 Justin Rohrlich, “Rags to Riches CEOs: Larry Ellison,” Minyanville.com, November 18, 2009,
http://www.minyanville.com/businessmarkets/articles/oracle-ibm-ellison-ampex-sdl-billionaire/11/18/2009/id/25369 (accessed November 2, 2010). 14 Michael Abbey, Oracle 9i: A Beginner’s Guide, (Berkeley, CA: McGraw-Hill, 2002).
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current offerings and allow it to compete in the middleware, applications, and industry-specific software arenas. The most transformational move was in the applications space, where Oracle had snapped up PeopleSoft, Siebel, and Hyperion, all of which provided enterprise management solutions.15 Oracle’s 2008 acquisition of BEA Systems, a middleware company that utilized service-oriented architecture infrastructure to better link databases and software applications, was notable because it provided Oracle with additional flexibility to link all the products in its portfolio.16 By early 2009, Oracle had become the biggest supplier of commercial software.
Sun Microsystems
Sun Microsystems, Inc., established in 1982 by three Stanford graduate students, built desktop computers and workstations. Sun entered the market at a time when pairing proprietary hardware, operating systems, and software was the norm. Sun broke new ground with its UNIX-based Solaris, which made its computers compatible with many other software and hardware products available on the market.17 Sun’s success, similar to Oracle, was attributed to rapid computerization of the companies’ records where new workstations rapidly replaced the behemoth “minicomputers.” From 1985 to 1989, Sun grew at average annual rate of 145%, reaching the status of fastest-growing company in America. The next step in Sun’s stardom was due to its development, in 1989, of a new chipset based on scalable performance architecture (SPARC). Sun’s SPARCs enhanced existing products by allowing it to create the smallest and fastest workstations on the market at the time. Combining the high-quality hardware with excellent on- and off-site customer service was a recipe for success.
Alongside the best-in-its-class workstations, Sun had been the proud owner of the Solaris operating system, which successfully competed with Microsoft Windows in the corporate world and was treasured by many in the industry. In 1995, the company had also developed the Java programming language, which customers universally loved and had become an industry standard for developing software for web applications. Virtually all PCs and eventually mobile phones required Java, which Sun licensed for a small fee. In 1997, Oracle converted to Sun’s Java programming language, thus allowing its applications to be easily used by web developers. Oracle had also adopted the Linux operating system.
Sun went public in 1986 with a solid product offering dominated by its hardware sales. It had thrived until the turn of the century, when competition and market trends had turned against the company. After an altercation with Microsoft in the late 1990s, Sun was forced to make Java and Solaris available to users gratis. The burst of the dot-com bubble had hit Sun hard by almost annihilating its high-end hardware sales to the financial sector. The economic downturn following the dot-com bust had forced financial conglomerates to cut costs and move to lower-end hardware offered by Sun’s competitors.18 Companies had also started to shy away from the SPARC proprietary chip line favoring more widely used chips from Intel and Advanced Micro
15 Oracle Corporation, “Oracle Corporate Timeline,” http://www.oracle.com/timeline/index.html (accessed November 2, 2010). 16 “Oracle to Acquire BEA Systems,” Oracle Corporation press release, January 16, 2008. 17 “Sun Microsystems, Inc., Company History,” http://www.fundinguniverse.com/company-histories/Sun-Microsystems-Inc-Company-
History.html (accessed November 2, 2010). 18 Matthew Karnitschnig, “IBM in Talks to Buy Sun in Bid to Add to Web Heft,” Wall Street Journal, March 18, 2009.
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Devices. Sun’s product mix had begun to move from predominantly hardware to a mix of hardware, software, and services, but waning hardware sales were not offset by gains in other offerings.19
Sun tried to leverage its acclaimed software systems to boost hardware sales by making Java (and later Solaris) an open-source platform in 2007. Open-source software allowed developers to adjust the platform to their specifications and thus provided a greater ability to adapt systems to a variety of tasks. The rationale for changing was to compete with Symbian and Microsoft in the mobile phone market and to increase the number of users. Sun had also expected this move would lead to greater adoption of the Solaris platform in the corporate world and drive hardware sales in uncaptured markets.20 In reality, these moves failed to garner the sales Sun had anticipated. Sun was losing consumers on the high end to IBM and on the low end to Dell and HP, and nothing seemed to be able to change the trend.21 In January 2008, Sun decided to move in yet another direction by announcing it would acquire MySQL AB for $1 billion. The company’s core product was open-source database management software, touted as the world’s most popular. MySQL was widely used by companies, such as Facebook, that ran websites on thousands of servers. By adding MySQL, Sun had hoped to find new outlets for its existing product lines and also to distribute MySQL through current channels.22
All the efforts to revive the once-glorious company were undermined by the financial crisis in 2007. In 2008, facing a banking industry on the brink of collapse and finding themselves unable to borrow to finance their immediate needs, companies reined in capital expenditures; naturally, computer and software updates were put on the back burner. In November 2008, well into the swing of the crisis, Sun announced plans to reduce its work force by approximately 15%.23 Sales in 2009 were expected to drop by 17.5% from $13.9 billion to about $11.4 billion. Sun was expected to record a charge of $1.5 billion for goodwill impairment. The company that once had a reputation for turning laboratory successes into profits was headed into a tailspin. At that point, company management started to look for a potential suitor.
Oracle Eyes Sun
Ellison was one of those suitors who believed in the future of Sun as a part of Oracle. In his opinion, many smaller companies were doomed due to slowing revenue growth and the desire by clients to work with fewer suppliers. Armed with a respected management team and a war chest of more than $8 billion in cash,24 Oracle aggressively pursued acquisition. Oracle had followed Sun for some time, hoping to capitalize on Sun’s misfortunes by getting specific assets or the entire company at a deflated price (Exhibit 7). On March 12, 2009, Oracle contacted Sun about acquiring some assets. Within a week, while Sun was mulling Oracle’s offer, a rumor surfaced that IBM was considering taking over Sun. On April 6, 2009, news broke that IBM and Sun had been in serious merger talks for more than a month. But the negotiations did not end in a deal, and Oracle did not wait long to step in. After all, the combination of Oracle’s databases and Sun’s servers had driven both companies’ sales for much of 1990s. Both companies formed a united front against Microsoft, exploiting Solaris and Java as foundations for business software.
19 Sun Microsystems, Inc., Form 10-K, September 27, 1999. In 1999, Sun generated $9.6 billion in revenue from its hardware segment, while
software and services added $1.6 billion. Ten years later, in 2009, Sun’s business mix had changed dramatically; the Systems and Services segments were expected to generate $6.7 and $4.7 billion in revenue, respectively.
20 Connie Guglielmo, “Sun Makes Java Free, Expands Mobile-Phone Software,” Bloomberg Online, Bloomberg, May 8, 2007. 21 Morningstar, “Sun Microsystems, Inc.,” Morningstar, October 31, 2008. 22 “Sun to Acquire MySQL.” Sun Microsystems, Inc., press release, January 16, 2008. 23 “What’s Next after IBM-Sun Merger Talks Fizzle?,” EE Times Asia, April 8, 2009. 24 Oracle Corporation, Form 10-Q, February 28, 2009.
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Ellison’s stated vision was to transform Oracle into the Apple for the business customer by delivering high-quality, seamlessly integrated consumer products where software and hardware components were developed in conjunction, thus minimizing the customer setup process.
Strategically, the merger would combine Oracle’s dominant position in the software space with Sun’s expertise in hardware and networking (Exhibit 8). The move also added the prized Java, MySQL, and Solaris platforms to Oracle’s portfolio. The cannibalization of software products, though possible, was expected to be minimal. Although core Oracle products and MySQL were both database management systems, they appealed to different customers and were not in competition: Oracle could sell its software to the high-end clients while effectively serving smaller clients well. The corporate development team was sure that Oracle could capitalize on Sun’s customer base and service contracts. The move made perfect sense strategically; the only matter to be determined was the price. That’s where Madison and her valuation team stepped in.
Fortunately, Madison had already collected plenty of information needed to put a price on Sun; she had gathered it when Oracle had first showed interest. She had market data for comparable companies (Exhibit 9), the appropriate yields (Exhibit 10), balance sheets for both Sun and Oracle (Exhibits 11 and 12, respectively), and historic financials for Oracle (Exhibit 13). With Oracle entering into a confidentiality agreement with Sun, she had also received access to proprietary information. Madison and her team had spent a great deal of time looking at Sun’s historical record and carefully developed projections for its future performance as a standalone company (Exhibit 14), which she knew would be the cornerstone of crafting a firm valuation.
The next step was to determine how much extra value Oracle could generate by making Sun’s operations more efficient, cutting outdated and inefficient products and departments, streamlining remaining product lines, and introducing new synergistic systems. Knowing that a significant percentage of anticipated merger synergies were never realized historically, Madison and her team were fairly conservative with their estimates.
Cost cutting was the easy part. Having restructured and implemented lean operations in a line of past acquisitions, Madison and her colleagues were pros at trimming the fat. They knew Oracle could reduce Sun’s staff by 20% to 25%, slash SG&A expenses by 22% to 32%, and allocate a significant amount for other restructuring costs. Estimating sales forecasts, potential new product lines, and software licensing was a completely different story, which necessitated bringing the marketing, sales, and R&D people on board.
First of all, Oracle team members expected Sun to initially lose some customers as a result of the merger. They knew that uncertainty of product offerings would push some customers to delay purchases and some to switch to competitors. After all, nobody wanted to buy an expensive piece of computer equipment only to find later that it would not be supported by the new owners of the company. Another issue was the lower- end customers that Oracle had never dealt with before. The marketing team expected these customers to hesitate to buy from Oracle for fear of being pushed into buying more expensive products. Marketing specialists knew that rivals would use similar arguments in aggressively pursuing Sun’s clients. The only thing Oracle could do on this front was to minimize the extent of customer attrition. Oracle’s marketing department was already working on a plan to reassure low- and high-end customers alike of continued service.
The second order of business was Sun’s precious software. Although the open-source software could be downloaded free of charge, customers could elect to pay for product support and updates. The software had been particularly attractive during the recession. Market surveys, which Oracle had quietly conducted, suggested that customers might be open to paying a small fee for software downloads. The quality of Sun’s software was so well known and appreciated by the market that the Oracle team was certain to increase its
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revenue stream from software licensing. The bigger source of revenue, however, was in the potential new products at the intersection of Sun and Oracle technologies. After all, most of Oracle’s systems were built using Java and ran on the Solaris operating system.
The R&D team brainstormed on combining Oracle’s products and Sun’s hardware and software. Oracle had a long-standing plan to build Exadata machines that could handle both online transactions and data warehousing. Initially, the company had planned to use HP’s hardware, but the opportunities Sun offered were too good to miss. Oracle engineers were positive that combining Oracle software with FlashWire technology, which Sun possessed, and then putting it on Sun hardware, could create a transaction-processing database machine. This machine would be twice as fast as its predecessor and, with high probability, much faster than machines produced by its closest rival, IBM.
When Madison put a bottom line to the dollar value of all the potential synergies the merger could generate, the numbers were rather impressive. But the merger would also be costly. The team’s calculations suggested that integration charges would be close to $1.1 billion in aggregate, with most (about $750 million) incurred in 2010. It also anticipated an initial loss in operating income of about $45 million, due to loss of customers and/or delayed purchases. Cost cutting, licensing income, new products, and the addition of the “integrated application-to-disk” service had the potential to boost operating profit by as much as $900 million per year. Preferring to remain conservative, Madison assumed that such synergies would kick in gradually over a three-year time horizon starting in 2011.
The Decision
As Madison drove from San Francisco to her Redwood City, California, office the following morning, she wondered if her teammates had accounted for everything. She knew they were conservative in most of the financial projections, but they remained merely estimates. If rivals such as IBM placed a competitive bid for Sun over the weekend, Madison’s team and manager would go over the estimates yet again, evaluating every aspect of the due diligence Oracle conducted in its effort to acquire Sun.
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Exhibit 1
Sun Microsystems
Global Computer Hardware Sales
Data source: Datamonitor, “Global Computer Hardware: Industry Profile,” December 2008.
Global Computer Hardware Sales by Product: 2008
Global Computer Hardware Sales: 2004–08
PCs 48.4%
Servers and Networking
29.2%
Printers 10.4%
Monitors 8.0%
Other 4.1%
0.0%
2.0%
4.0%
6.0%
8.0%
0
100
200
300
400
500
2004 2005 2006 2007 2008
G row
th
(% )
S al
es (
$ b
il li
on s)
Sales Growth
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Exhibit 2
Sun Microsystems
Global Software & Services Sales
Data source: Datamonitor, “Global Software & Services: Industry Profile,” March 2009.
Global Software & Services Sales by Product: 2008
Global Software & Services Sales: 2004–08
Software 48.4%
Internet Software &
Services 29.2%
IT Services 10.4%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
0
500
1,000
1,500
2,000
2,500
2004 2005 2006 2007 2008
G row
th
(% )
S al
es (
$ b
il li
on s)
Sales Growth
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Exhibit 3
Sun Microsystems
Global Software & Services Sales by Share, 2008
Data source: Datamonitor, “Global Software & Services: Industry Profile,” March 2009.
1 EDS was acquired by HP in 2008.
Other 91.5%
IBM 3.6%
MSFT 2.7%
EDS1
1.1% ORCL 1.0%
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Exhibit 4
Sun Microsystems
IT Industry Companies
Sources: Industry reports and Bloomberg.
Primarily Hardware Description Key Products Notable Acquisitions Advanced Micro Devices
Develops and manufactures semiconductors and microprocessors
x86 microprocessors, microprocessors for computers and servers
*ATI Technologies (2006)
Apple Designs, manufactures, and markets personal computers, related software and mobile communication and entertainment devices
Macintosh computers, iPhones, iPods, music- related products
Dell Offers a wide range of computers and related products
Desktop and laptop computers, software and peripherals, servers
*EqualLogic (2008)
EMC Provides enterprise storage systems, software, networks, and services
Information storage, VMware
Hewlett-Packard Provides imaging and printing systems, computing systems, and information technology for business and home
Consulting services, enterprise storage and servers, personal computers, digital cameras, printers and ink
*Compaq (2002) *EDS (2008)
Intel Designs and manufactures computing and communications components and platforms
Microprocessors, chipsets, motherboards, platforms
International Business Machines
Offers computer solutions through the use of advanced information technology
Consulting services, middleware, servers, laptops
NetApp Provides storage and data management solutions Filers Sun Microsystems Provides products, services, and support for
building and maintaining network computing environments
Enterprise systems and services; storage and software platforms Java, Solaris, and MySQL
*MySQL (2008)
Primarily Software Adobe Systems Develops, markets and supports computer
software products and technology Creative solutions, Acrobat
Microsoft Develops, manufactures, licenses, sells and supports software products
Windows, business and server software, gaming and handheld devices
Novell Provides network and Internet directory software and services
Enterprise networking software
Oracle Supplies software for enterprise information management
Relational databases, middleware software, applications, related services
*PeopleSoft (2005) *Siebel Systems (2006) *Hyperion Solutions (2007) *BEA Systems (2008)
Red Hat Develops and provides open source software and services
Linux
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Exhibit 5
Sun Microsystems
Relative Sales Growth, 2000–08
Data source: Compustat.
Primarily Software Companie s
Primarily Hardware Companie s
-100.0%
0.0%
100.0%
200.0%
300.0%
400.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008
-150.0%
0.0%
150.0%
300.0%
450.0%
600.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008
Apple
NetApp
HP
Dell EMC
IBM
Sun
Red Hat
Adobe Microsoft
Oracle
Novell
Intel
AMD
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Page 15 UV5626
Exhibit 7
Sun Microsystems
Relative Stock Performance, January 3, 2006 to April 16, 2009
Data sources: Yahoo! Finance and Wharton Research Database Service.
-100.0%
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Sun Oracle S&P 500
200820072006 2009
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9/14/08: Collap se of Lehman Brothers
3/16/09: Rumors of IBM acquisition of Sun surface
3/14/08: Fed bails out Bear Stearns
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For the exclusive use of I. LUGO, 2020.
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Page 18 UV5626
Exhibit 10
Sun Microsystems
Relevant Security Yields, April 2009
Data sources: Mergent Bond Record, U.S. Treasury, and Ibbotson Associates.
Corporate Bond Yields AAA 5.50% AA 5.77% A+ 6.27% A 6.35% A- 6.50% BBB+ 7.54% BBB 7.62% BBB- 8.64% BB+ 11.42% BB 11.49% BB- 11.70% B+ 13.28% B 14.70% B- 15.46%
U.S. Treasury Yields 180-Day 0.34% 1-Year 0.54% 3-Year 1.22% 5-Year 1.71% 10-Year 2.82% 30-Year 3.66%
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Page 19 UV5626
Exhibit 11
Sun Microsystems
Sun Microsystems Historical and Projected Balance Sheet (in millions of U.S. dollars)
(1) (Sun Microsystems’) long-term strategy is to maintain a minimum amount of cash and cash equivalents in subsidiaries for operational purposes and to invest the remaining amount of our cash in interest-bearing and highly liquid cash equivalents and marketable debt securities. (2) Deferred taxes and related accounts are not expected to vary with sales or continue to accumulate as a company growth. (3) Includes deferred settlement income from Microsoft as of June 30, 2009, 2008, 2007, and 2006, long-term tax liabilities as of June 30, 2009, 2008, 2007, and 2006, and long-term restructuring liabilities.
Data sources: Company filings and case writer estimates.
2007 2008 2009E As s ets Current As sets
Cash (1)
3,620 2,272 1,876 Marketable Debt Securities 2,322 1,038 1,185 Net Receivables 2,964 3,019 2,258 Inventory 524 680 566
Deferred Prepaid Taxes (2)
200 216 188 Other Current As sets 1,058 1,218 995
Total Current Ass ets 10,688 8,443 7,068 Property, Plant, & Equipment, Net 1,504 1,611 1,616 Goodwill 2,514 3,215 1,743 Intangible Ass ets 633 565 269 Other Noncurrent Ass ets 499 506 536
Total Ass ets 15,838 14,340 11,232
Liabilities & Equity Current Liabilities
Accounts Payable Including Accrued Payroll 2,222 2,121 1,600 Short/Current Long-Term Debt 1 - 554
Deferred Taxes (2)
2,047 2,236 2,341 Other Current Liabilities Including Warranty Res erve 1,182 1,311 1,126
Total Current Liabilities 5,451 5,668 5,621 Long-Term Debt 1,264 1,265 695
Deferred Long-Term Charges (2)
659 683 635
Other Noncurrent Liabilities (3) 1,285 1,136 976
Total Liabilities 8,659 8,752 7,927
Stockholders ’ Equity Common Stock 6,987 7,391 7,582 Treas ury Stock (311) (2,726) (2,569) Retained Earnings 189 430 (2,055) Other Stockholders ’ Equity 314 493 347
Total Stockholders’ Equity 7,179 5,588 3,305
Total Liabilities & Equity 15,838 14,340 11,232
Fis cal Year-End June 30
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Page 20 UV5626
Exhibit 12
Sun Microsystems
Oracle Historical and Projected Balance Sheet (in millions of U.S. dollars)
Data sources: Company filings and case writer estimates.
2007 2008 2009E As s e ts
Current Assets Cash & Cash Equivalents 7,020 11,043 12,624 Net Receivables 4,589 5,799 4,430 Inventory - - - Other Current Assets 1,274 1,261 1,527
Total Current Assets 12,883 18,103 18,581 Property, Plant, & Equipment, Net 1,603 1,688 1,922 Goodwill 13,479 17,991 18,842 Intangible Assets 5,964 8,395 7,269 Other Noncurrent Assets 643 1,091 802
Total As s e ts 34,572 47,268 47,416
Liabilitie s & Equity
Current Liabilities Accounts Payable 315 383 271 Short/Current Long-Term Debt 1,358 1,001 1,001 Other Current Liabilities 7,714 8,645 7,877
Total Current Liabilities 9,387 10,029 9,149 Long-Term Debt 6,235 10,235 9,237 Deferred Long-Term Charges 1,121 1,218 480 Other Noncurrent Liabilities 910 2,761 3,460
Total Liabilities 17,653 24,243 22,326
Stockholders’ Equity Common Stock 10,293 12,446 12,980 Treasury Stock - - - Retained Earnings 6,223 9,961 11,894 Other Stockholders’ Equity 403 618 216
Total Stockholders’ Equity 16,919 23,025 25,090
Total Liabilitie s & Equity 34,572 47,268 47,416
Fis cal Ye ar-End May 31
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Page 21 UV5626
Exhibit 13
Sun Microsystems
Oracle Historical and Projected Income Statement (in millions of U.S. dollars)
Data sources: Company filings and case writer estimates.
Fiscal Year-End May 31 2007 2008 2009E
Software Revenues 14,211 17,843 18,877 Services Revenues 3,785 4,587 4,375
Net Revenue 17,996 22,430 23,252 Selling, General, & Administrative 8,790 10,468 10,217 Research & Development 2,195 2,741 2,767 Amortization of Intangible Assets 878 1,212 1,713 Other Operating Expense 159 165 234
Total Operating Expense 12,022 14,586 14,931 Operating Income 5,974 7,844 8,321
Income Tax on Operations 1,709 2,316 2,380
Net Operating Profit After Tax 4,265 5,528 5,941
Effective Corporate Tax Rate 28.6% 29.5% 28.6%
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