Sun Microsystems Case Study Valuation Methods

Product Overview

This case is designed for use in Corporate Finance courses at the MBA level or in an advanced undergraduate Valuation class. The primary objective of this exercise is to introduce or reinforce valuation tools in the context of mergers and acquisitions. A teaching note and student spreadsheet accompany this case. This case is written from the perspective of a member of Oracle's valuation team during Oracle's bid to acquire Sun Microsystems in 2009. Sun was an industry leader in the IT sector, and it had many suitors, including IBM. Oracle had distinguished itself as the world's largest and most reputable sellers of database management systems and other related software, and it had recently acquired several low-margin companies and turned them into higher-margin operations. Combining Sun and Oracle had the potential to create the Wal-Mart of the enterprise software industry. Supplemental student and faculty spreadsheets are available to verified users.

combining these two companies had the potential to create the Wal-Mart of theenterprise software industry. This report is meant to assess whether SM would be astrategic fit for Oracle and at what price. To do so, we valued SM both from a standalone case, and also based on the expected synergies after the acquisition. We used three different approaches to value SM. The first approach was to addthe market capitalization and debt of SM to determine an enterprise value (EV) of about$6.20 billion. Second, using a multiples analysis based on comparable companies, wedetermined SM’s EV to be about $3.87 billion. Third, using the discounted cash flowmethod, we determined SM’s EV to be about $4.53 billion as a stand alone company,and $8.95 billion. The disparity between of values from the different approaches weredue to different assumptions, but also justified by the fact that SM was struggling prior tothe acquisition talks. Is SM a good strategic fit for Oracle?From our point of view, SM is a good fit for Oracle for two reasons.First of all,Oracle’s objective was to become the Apple for business customers. It needs toessentially streamline its business. While Oracle had a dominant position in software, itcan append Sun’s core strength in hardware and networking to create the desiredenterprise offerings. Additionally, Oracle would add Sun’s Java, MySQL, and Solarisplatforms to its portfolio. Finally, adding SM would mean expanding Oracle’s reach

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