Sun Microsystems – Case Solution

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Sun Microsystems Case Answers

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Executive Summary – Sun Microsystems

The latest acquisition Oracle is considering is Sun Microsystems, a hardware company that initially had great success thanks to its 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 its capabilities to expand Oracle’s operations and increase the latter’s net income.

Main Analysis

I.  Case Background

a.  Oracle

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 its data and access specific information quickly.

Among its first adopters were government and intelligence agencies. Today, every large US company utilizes RDBMS to organize its information in its various departments.

Oracle’s offerings go beyond just the database software. The company offers its clients support and training as well as on-site 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 its 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 2000s led to many of Sun’s customers changing over to cheaper competitors to cut costs.

Sun tried to offset the lack of revenue growth in its hardware sector by emphasizing its 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…