The latest acquisition Oracle is considering is Sun Microsystems, a hardware company that initially had great success thanks to their innovations. Oracle is looking to merge with Sun and take advantage of their deflated price to gain new assets, create new products, and greatly increase its revenues. This case study presents a computation of the true value of the share price of Sun Microsystems for Oracle to submit a reasonable bid.
Scott Jacobs and Prescott C. Ensign
Harvard Business Review (906M23-PDF-ENG)
March 03, 2006
Case questions answered:
- Is Sun Microsystems a good strategic fit for Oracle?
- What approaches would you use to place a value on Sun Microsystems?
- Assuming a discounted cash flow valuation:
a. What rate of return should Oracle require on the acquisition?
b. What base-case cash flows do you forecast?
c. What is your estimate of terminal value?
d. What is the enterprise value of Sun Microsystems? What is the equity value?
- Conduct a multiples analysis to value Sun. What economic fundamentals are reflected in the multiples?
- Identify the synergies and conduct a sensitivity analysis to estimate the effect of synergies on enterprise value.
- If a competing bidder appears, how high a price should Oracle be willing to offer?
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Case answers for Sun Microsystems
This case solution includes an Excel file with calculations.
Executive Summary – Sun Microsystems
The latest acquisition Oracle is considering is Sun Microsystems, a hardware company that initially had great success thanks to their innovations. However, Sun has come upon hard times and has been unable to reverse this trend. Oracle could merge with Sun and take advantage of their deflated price to gain new assets.
Oracle is a technology company that specializes in database management software. Its technology has been adapted to work across many companies and departments over the years and is widely popular. Its growth in recent years has left the company with an excess of cash that has been used to acquire companies that are either comparable to Oracle or would allow it to break into new markets.
A merger between the two companies would open new possibilities for Oracle to create new products and greatly increase its revenues. Although Oracle is far from the only company looking to acquire Sun and to guarantee they accept Oracle’s offer, Oracle needs to make sure it is willing to pay a fair price for Sun Microsystems’ shares.
To determine how much Oracle would be willing to pay, several discounted cash flow models were created to determine the worth of the shares both with and without synergies. The original estimate of the price was rather high due to overzealous estimates about the revenue growth expected to be experienced after the merger.
By readjusting the discounted cash flow model, the true value of Sun’s shares with synergies was determined, and it was closer to $13.
It is proposed that an initial offer of $9.50 a share should be presented. Oracle can increase the price up to $13 if there are competitive bids. That way, Oracle can still buy Sun Microsystems at a discount and utilize their capabilities to expand Oracle’s operations and increase the latter’s net income.
I. Case Background
Oracle was founded in 1977 by three software engineers who developed the first relational database management system (RDBMS). This software allowed a company to store their data and access specific information quickly.
Among its first adopters were government and intelligence agencies. Today, every large US company utilizes RDBMS to organize their information in their various departments.
Oracle’s offerings go beyond just the database software. The company offers its clients support and training as well as on-sight installations and integration of its software.
In the 1980s, Oracle began working to create applications based on its original software. Over time, the company was able to create software for different kinds of companies and the different roles within those companies.
By the year 2000, Oracle’s revenue and profit had grown considerably, thanks to this new technology. The high profits allowed the company to begin acquiring other companies.
In the last four years, it has spent $30 billion on over 50 companies. A small number of these companies would be used to help update and innovate the RDMBS software, while most of them would be used to allow Oracle to penetrate new markets.
These acquisitions allowed Oracle to develop software in several new markets and helped the company become the biggest supplier of commercial software.
b. Sun Microsystems
The success of Oracle’s expansion has led it to begin eyeing Sun Microsystems, a company that designs and manufactures computer workstations. Sun created a workstation that was compatible with numerous other software and hardware on the market. This development led to considerable growth in the late ’80s.
From there, Sun began to rapidly improve their products, making them faster and more efficient and developing the programming language Java. This software became instantly popular for developing web applications and soon became an industry standard.
Despite their early successes, Sun Microsystems began to experience growing pains. The bursting of the dot com bubble in the early 2000’s lead to many of Sun’s customers changing over to the cheaper competitors to cut costs.
Sun tried to offset the lack of revenue growth in their hardware sector by emphasizing their other sectors. However, growth in these new sectors was not enough to offset losses in hardware.
Despite the multiple initiatives Sun Microsystems underwent, the 2008 financial crisis further negated its previous success. And now, the company is making decisions on how to downsize.
c. Sun Microsystems Acquisition
Due to Sun’s downturn, Oracle has begun looking to acquire the company and make it a part of its operations. Oracle’s goal is to purchase the company’s assets at what it believes to be a deflated price. However, it was not the only company currently looking to purchase Sun.
Oracle plans to…