This case calls for students to reevaluate the price Oracle should pay to acquire its long-term business partner, Sun Microsystems. The emergence of new suitors (e.g., IBM) forces Oracle’s corporate development team to go back to the drawing board and reevaluate all the assumptions they have made in putting together the initial bid of $7.38 million, or $9.50 per share, on April 17, 2009. Students are invited to value Sun’s stock and take a position on whether there is any room left to sweeten the offer if a bidding war unfolds. The case outlines the Oracle strategy and how long-term partnering with Sun contributed to it to date. It also allows for an in-depth discussion of the changing competitive landscape of the technology industry.
The case is an exercise in valuing a potential acquisition target. It presents an opportunity for students to develop appreciation for valuing a company using both discounted cash flow and multiples in their analysis. Particular attention should be paid to the inclusion of synergies and their relevance to the valuation. The bidding dimensions of the case are highlighted by the presence of other potential acquirers.
Objectives
The primary objectives of this exercise are to introduce or reinforce valuation tools in the context of mergers and acquisitions:
- Analyzing a variety of strategic, organizational, financial, and economic issues associated with mergers and acquisitions
- Developing a framework for valuing acquisition candidates
- Evaluating both quantitative and qualitative factors affecting merger agreements
The case could benefit from being assigned together with the technical note “Methods of Valuation for Mergers and Acquisitions” (UVA-F-1274).[1]
Questions
- Is Sun Microsystems a good strategic fit for Oracle? Should Oracle acquire Sun Microsystems?
- How much is Sun worth? What approaches would you use to place a value on Sun Microsystems? (Hint: Stand-Alone Value, Acquisition Price and Value with Synergies)
- Assuming a discounted cash flow valuation:
- What rate of return should Oracle require on the acquisition?
- What base-case cash flows do you forecast?
- What is your estimate of terminal value?
- What is the enterprise value of Sun Microsystems? What is the equity value?
- Conduct a compare companies or 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?
[1] Susan Chaplinsky, Michael J. Schill, and Paul Doherty, “Methods of Valuation for Mergers and Acquisitions,” UVA-F-1274 (Charlottesville, VA: Darden Business Publishing, 2000).
