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By looking at its synergy value Oracle can most accurately see how this merger will benefit them. The best way to approach this would be to utilize a discounted cash flow valuation of the synergies created from this merger. A positive value for this valuation means that this is a good decision on Oracle’s behalf. Assuming a discounted cash flow valuation:-What rate of return should Oracle require on the acquisition?Oracle should require a rate of return equal to Sun Microsystem’s Weighted Average Cost of Capital (WACC). Therefore, Oracle should require a rate of return of 12.05%.
The weight of debt was calculated from DebtDebt+Market Capitalizationfound in Exhibit 9. From this you can derive the weight of equity. The cost of debt was derived from Exhibit 10 since the bond rating for Sun Microsystems is Ba1 from Moody’s which is equivalent to a BB+ from S&P.The cost of equity was calculated using CAPM and an assumed MRP of 6%.-What base-case cash flows do you forecast?It would be best to forecast Sun Microsystem’s cash flows for the next 5 years, from 2010 to 2014. The cash flows will increase from 2010 to 2011. Then, they will decrease from 2011 to 2012. Then, they will increase again from 2012 to 2014. -What is your estimate of terminal value?Based on Exhibit 14, Net Operating Working Capital is 10.12% of revenues and Plant Property and Equipment is -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?-BibliographyLoutskina, Elena and Varney, Eric. 2015, Sun Microsystems,retrieved from the Harvard Business School – Case Studies. Case # 5629.