Sun Microsystems a good strategic fit for Oracle?

As presented in the case study, the oracle management and offices in the past did not have any

interest in investing on an operating system or becoming a hardware seller. However in a

situation where the purchase was to be closed then it would means that they would become an

operating system and hardware seller. In an event where there is an upside the company closing

this presented deal, it would means that oracle would be in a position to combine the software

application middleware, operating system and have a database on top of the already existing

hardware. The anticipated move would therefore be in line with the Mr. Larry Ellison’s vision

who is the Chief executive officer of Oracle Company which states “creating an end to-end

vendor that clients go to for all their technology needs”. The vision deals with the transformation

of oracle from a software based company that packages the system to the database to disks. The

acquisition would help oracle to improve through effective integration with other companies

making the proposal immense to sun microsystems

Use a discounted cash flow (DCF) analysis to place a value on Sun Microsystems:

In my opinion I feel that through the creation of a discounted cash flow within the investment

would be the most effective approach to use in an effort to place a value on the sun microsystem.

The idea would also offer the company with a more effective idea on where the sun

microsystems which would prove to be financial viable within the allocated five years from time.

Additionally, the process would also offer a better understanding on how much capital the

company makes after the taxes and other related costs that are incurred in the process of running

a business.

Rate of return required on Oracle acquisition?

In this case, the rate in which I believe that oracle should required on the sun microsystem’s

acquisition should be similar or equivalent to the company’s (Weighted Average Cost of Capital)

WACC. In this case the sun microsystem WACC WAS 12.05 %. Based on the recommended

standards the weighted average cost of capital for this case is relatively low. Nevertheless as the

analysis continues it is evidence that there is more to consider even before the transaction is fully

closed. Here, WACC is calculated by

WACC=WD*Rd*(1-T) +We*Re

Where

WD =weight of debt

Ed cost of debt

We=weight of equity

Re=cost of equity

T=tax

Therefore WACC is the weight of debt within the capital structure that is calculated through the

use of the formula debt/ (debt market capitalization) where the capital asset pricing model

=RF+Beta *(Rm)

From exhibit 10 there is a market risk premium which has a 6% and the risk free rate that has its

rate of 2.82 with an assigned beta of 1.73 found from exhibit 9 using the formula above which

assuming that the tax rate is 35$ then we find WACC to be 12.05%

What base-case cash flows do you forecast?

Based on the presented information on Sun Microsystems financial statements, my predictions

on oracle future cash flows for the next five years with an intention of determining whether the

company is going to record better performance or not is the upcoming years. Additionally, both

companies have an increasing cash flows as the time progresses. The net working capital NWC

has a 10.12% net revenue as seen in exhibit 14 where PPE in which is presented in 14 was used

in the calculation of PPE. Additionally, the net working capital WACC that was designed through

deducting the net PPE from that of year 2010 with that of year 2009. Laslty, After getting the

change in the NWC where the free cash flows were expected from 2008 to 2014. Here, the free

cash flow FCF to get a terminal value of 7480

what is your estimate of terminal value?

The terminal value calculated for the firm one must first identify the perpetuity growth model

and then determine the various the multiples of companies that can be compared with. Since the

terminal value of 4815 was calculated through dividing the perpetuity growth of $444.35 by

12.05% WACC the growth rate was established to be 2.82%

What is the enterprise value of Sun Microsystems? What is the equity value?

In this question, the enterprise value of sun microsystem company is about $3129 ($mm). The

value calculated through finding the market capitalization for the sun microsystem was

calculated by adding the net present value NPV of the FCF free cash flow and the NPV of the

terminal value. On the other hand the enterprise value-debt +cash which is then divided by the

share number 739 and the results price per share was $7.5. The enterprise value in discounted

cash flow was calculated by adding the present value of terminal value and a net present value of

free cash flows to find it the formula of (enterprise value-debt+cash) for it is to be divided by the
number of shares 739 where the results will be $9.44 price per share.

Identify the synergies and conduct a sensitivity analysis to estimate the effect of synergies

on enterprise value.

Synergy value sensitivity analysis

Enterprise Equity Price

value in value in per

million million share ($)

Stand-alone (base-case using the perpetuity method 3653 5465 $7.4
Stand-alone (base-case) using the multiple method 5161 6973 9.44
Synergy using the perpetuity method 7632 9444 12.79
Synergy using the multiple method 10238 12050 16.32
Comparable company method 13.06
Oracle offer price 9.5
Sun microsystem current share price 6.69
In an event where oracle acquires Sun microsystem then certain synergies would appear, here,

oracle would have the ability to use Sun’s Java in their own various portfolio with an aim of

creating many other applications. Through adding MySQL to oracle company which will help

them add the lesser cliental to their client base. The explanation will be beneficial to oracle since

it will be able to further expand its product risks and lines. The amalgamation of the two

companies’ research and development will make it stronger.

If a competing bidder appears, how high a price should Oracle be willing to offer?

Sun microsystem implied offer Perpetuity growth Exit multiple Sun

price method ($) ($) microsystem

share price ($)

DCF using the synergy value 12.79 16.32 14.55
DCF using the standalone value 7.4 9.44 8.42
Current offer price by oracle 9.5
Average CCA 13.06

Here, the optimum price that was proposed to oracle was $11.38, the value computer through

finding the average of all the prices that were represented above along with the amount that was

offered by oracle where the formula is ((8.42+14.55+13.06+9.5)/4=$11.38