SunMicrosystemCaseStudy_final - Sun Microsystems Case Study...

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Sun Microsystems Case StudyExecutive SummaryMargaret Madison, a member of Oracle’s corporate development team, is dealingwith an acquisition decision. Oracle, one of the world’s largest and most reputablesellers of database management system and other related software, is contemplatingacquiring Sun Microsystems (SM), which was predominantly in the business of makinghardware, storage and providing services at the enterprise level. According to the case,
combining these two companies had the potential to create the Wal-Mart of theenterprise software industry. This report is meant to assess whether SM would be astrategic fit for Oracle and at what price. To do so, we valued SM both from a standalone case, and also based on the expected synergies after the acquisition. We used three different approaches to value SM. The first approach was to addthe market capitalization and debt of SM to determine an enterprise value (EV) of about$6.20 billion. Second, using a multiples analysis based on comparable companies, wedetermined SM’s EV to be about $3.87 billion. Third, using the discounted cash flowmethod, we determined SM’s EV to be about $4.53 billion as a stand alone company,and $8.95 billion. The disparity between of values from the different approaches weredue to different assumptions, but also justified by the fact that SM was struggling prior tothe acquisition talks. Is SM a good strategic fit for Oracle?From our point of view, SM is a good fit for Oracle for two reasons.First of all,Oracle’s objective was to become the Apple for business customers. It needs toessentially streamline its business. While Oracle had a dominant position in software, itcan append Sun’s core strength in hardware and networking to create the desiredenterprise offerings. Additionally, Oracle would add Sun’s Java, MySQL, and Solarisplatforms to its portfolio. Finally, adding SM would mean expanding Oracle’s reach
because Sun’s database management systems appealed to a different segment thanOracle’s original customer base. Secondly, the numbers worked out too. From a stand alone perspective, wewould consider SM’s value lower than what market data reflects. But since there areexpected synergies due to the nature of Oracle’s and SM’s business, we determinedthat SM is indeed a good strategic fit, even at a price tag of $7.38 billion, which wouldbe at a premium. Approaches to evaluating SM1)Based on Market data: EV = Market Value of the Equity + Market Value ofCommon Stock + Market Value of Debt + Market Value of Preferred Stock.Exhibit 9 of the case tells us that the stock price of SM was $6.69 per share andthere were 739 million shares. The market value of common stock is therefore$4,943.91 million. We used the book value of debt ($1,257 million) as a proxy tothe market value of debt. There was no information regarding preferred stocks,so we assumed that SM did not offer them. The valuation of SM based on theaforementioned market data is $6,200.91 million, or about $6.2 billion.

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