Sun Microsystems Case Solution
The case analysis of Sun ensures growth alternatives for Oracle that will increase the market share, as the Sun has already invested in technologies. This will lead to Â an increase in customers, globally. The Sun has better sales team and a beter R&D staff, which offers strong product quality. Moreover, the firm currently has 10.6% market share.
Both Oracle and the Sun announced the deal at 7.4 billion or $ 9.5 per share of Sun. Oracleâ€™s current market share was low and if it pays the cash, then it would impact the companyâ€™s profit, so Oracle has to pay by shares. For this, Oracle stock price should rise or the Sunâ€™s stock price should decline. Currently, Oracleâ€™s stock price is declining by 1.2% at $ 18.82 per share, while the Sunâ€™s stock price increased by 37% and reached at $ 9.15 per share. The reason for the Sunâ€™s outperformance is that they have no potential bankruptcy risk or any future growth uncertainties. Therefore, it led to their stock price improving by 40% according to NASDAQ.
On the other hand, Oracle was thinking about how to raise money in order to acquire Sun and its ability to run its operations successfully.
Theory of corporate finance perspective:
The Oracle needs to find options in order to raise capital to acquire Sun Microsystems. They have serveral alternatives, they chose the one to finance $ 7.4 billion.
The alternatives include:
Alternative 1: to use cash as the balance sheet shows $ 11 billion in its cash.
Alternative 2:Â Issue new stocks
Alternative 3: To borrow more
By looking at the cost of capital of both the companies, the Oracle cost of debt is 5.77% due to A2 ratings, and the Sun has Cost of debt at 11.42% due to BBB+ ratings by the NASDAQ. Although, the Sun is all equity firm but it is more risky due to lack of profits. The WACC of Sun is 8.42%, which is slightly higher than Oracleâ€™s WACC at 7.39%. The NPV of Sun is $ 16.7 billion, and the Oracleâ€™s NPV is $ 30 billion.
Alternative 1: Use of Cash
By looking at the internal equity i.e. cash of Oracle, it has $ 11 billion in cash and $ 9.9 billion in retained earnings. The total of cash is ($ 11b + $9.9 b = $ 20.9 billion). Oracle has enough cash to finance the whole acquisition of Sun but it might leave the zero cash after the acquisition and payment of other expenses.
Alternative 2: Issue new stocks
In a perfect equity market, the value of issuing stock would be same as the internal equity but the only difference is of the bullish and bearish market. The current equity value of Oracle is $ 23 billion. Therefore, the amount raised is $ 7.4 billion and the market value of equity as per balance sheet of 2008 shows the value at $ 23 billion. This shows Â that , the existing shareholders will keep 68% by not changing value of equity.
If the company is issuing the stock to finance the acquisition, Oracleâ€™s stock is in a bearish state. Oracle has a disadvantage in using this, which would then lead the public to a negative signal that the companyâ€™s stock is undervalued. Â Therefore, merging Sun through issuance of equity would not be a good decision…………………..
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