Abridged Pitch Book

Sun Microsystems
Submitted by
Patoju Sai Harshavardhan
2015PGP254

Competitive Landscape
The Technology industry had historically comprised of three sectors:
Hardware
Software and Services
Storage and Peripherals
500

Growth (%)

Sales ($ billions)

6.0%

300

2.0%

100
0

0.0%
2004

2005
2006
Sales

2007
2008
Growth

2,000

12.0%
Growth (%)

Sales ($ billions)

15.0%

1,500

9.0%

1,000

6.0%

500

3.0%

0.0%
2004

2005
2006
Sales

2007
2008
Growth

ORCL
1.0%

PCs
48.4%
Servers
and
Networki
ng
29.2%

Other
91.5%

Global Computer Hardware Sales by Product: 2008

2,500

EDS1
1.1%

Printers
10.4%

4.0%
200

MSFT
2.7%

Other
Monitors
4.1%
8.0%

8.0%

400

IBM
3.6%

IT
Services
10.4%

Internet
Softwar
e&
Services
29.2%

Software
48.4%

Global Software & Services Sales by Share: 2008

Financial Crisis, beginning in 2007, shrunk

sales
So IT companies started looking for
opportunities to increase their revenues,
paving way to acquisitions in the
industry.

IT Industry
Major IT companies
andCompanies
trends in the industry
Primarily Hardware
Advanced Micro
Devices
Apple

Dell
EMC
Hewlett-Packard

Intel
International Business
Machines
NetApp
Sun Microsystems

Primarily Software
Adobe Systems
Microsoft
Novell
Oracle

Red Hat

Description
Key Products
Develops and manufactures semiconductors and x86 microprocessors, microprocessors for
microprocessors
computers and servers
Designs, manufactures and markets personal Macintosh computers, iPhones, iPods, music
computers,
related
software
and
mobile related products
communication and entertainment devices
Offers a wide range of computers and related Desktop and laptop computers, software and
products
peripherals, servers
Provides enterprise storage systems, software, Information storage, VMware
networks and services
Provides imaging and printing systems, computing Consulting services, enterprise storage and
systems, and information technology for business servers, personal computers, digital cameras,
and home
printers and ink
Designs and
manufactures
computing and Microprocessors,
chipsets,
motherboards,
communications components and platforms
platforms
Offers computer solutions through the use of Consulting services,
middleware,
servers,
advanced information technology
laptops
Provides storage and data management solutions
Filers
Provides products, services and support for Enterprise systems and services, storage and
building and maintaining network computing software platforms Java, Solaris and MySQL
environments

Develops, markets and supports computer

software products and technology
Develops, manufactures, licenses, sells and
supports software products
Provides network and Internet directory software
and services
Supplies software for enterprise information
management

Notable Acquisitions
*ATI Technologies (2006)

*EqualLogic (2008)

*Compaq (2002)
*EDS (2008)

*MySQL (2008)

Creative solutions, Acrobat

Windows, business and server software, gaming
and handheld devices
Enterprise networking software
Relational databases, middleware
applications, related services

Develops and provides open source software and Linux

services

software, *PeopleSoft (2005)

*Siebel Systems (2006)
*Hyperion Solutions (2007)
*BEA Systems (2008)

Target Company: SUN MICROSYSTEMS

Established in 1982, Built desktop computers and workstations

UNIX-based Solaris, ground breaking in market.
Fastest growing company in America, 1985-89
Sun went public in 1986.
Development of a new chipset (SPARC) in 1989
In 1995, company developed the Java programming language which had become a huge success.
The burst of dot-com bubble had hit Sun hard; Suns product mix had begun to move from predominantly hardware to a mix of
hardware, software, and services.
Made Java an open-source platform in 2007.
Sun was losing its customers to competitors, In January 2008, Sun announced its plan to acquire MySQL AB for $1 billion.
Financial crisis in 2007 made it difficult to bring back the old glory.
In November 2008, Sun announced plans to reduce its work force by 15%.
100.0%
Sales in 2009 were expected to drop by 17.5% from $13.9 billion.
75.0%
Sun was expected to record a charge of $1.5 billion for goodwill impairment.
50.0%
SUN MICROSYSTEMS

25.0%

30,000
$13.88 billion

Storage
$2.4
Services
$5.3

Servers
$6.3

Employees: 30000
FY 2008 Revenues: $13.88 billion
FY 2008 Profit: $403 million
Key Products: Server computers,
storage devices, Java, and Solaris
technology

0.0%
-25.0%

-50.0%
-75.0%
-100.0%
Sun

Oracle

S&P 500

Relative Stock Performance, January 3, 2006, to April 16, 2009

Deal Rationale
Strategically, the merger would combine Oracles dominant position in the software space
with Suns expertise in hardware and networking.
Oracle could capitalize on Suns customer base and service contracts.
Cost Cutting
Oracle could reduce the staff by 20% to 25%
Slash SG&A expenses by 22% to 32%.
And Other restructuring activities, lean operations.
Revenue Generation
The quality of Suns software was well known and appreciated by the market and
recent market surveys indicate that customers are willing to pay a small fee for
software downloads. Oracle will tap into this revenue stream from Software licensing.
Potential new products at the intersection of Oracle and Sun.
Boost to the plans of oracle to build Exadata machines that could handle both online
transactions and data warehousing.
Integrated application-to-disk service.

Valuation Assumptions
Sun MicroSystems (2009)

FCF Valuation is employed.

Terminal growth rate is assumed to be 4%
Current portion of long term debt is assumed to be serviced at the
end of 2009. (from Exhibit11)
Corporate Tax rate is taken as 28.6%.
US treasury yields 10 year bonds is taken a Risk free rate.
Corporate bond yield for BB+ rating is considered as appropriate Cost
of debt.
Net Working capital is estimated to grow at the same rate as
revenues.
Valuation is done from year 2010 as Oracle would be acquiring it
towards the end of FY2009.
Integration Costs are taxable.( $750mn in 2010 and $350mn in 2011)
Increase in operating profit of $900mn from 2011

Debt (BV)
Shares Outstanding (millions)
Share Price
Equity(MV)
Beta (Levered)
Rf
kd
MRP
ke
WACC

1257
738.59
6.69
4941.1671
1.734
2.82%
11.42%
6%
13.22%
12.20%

Sun MicroSystems (After 2009)

Debt
Wd
Equity
We
Unlevered Beta
Beta
ke
WACC (To be used for valuation)

703
0.1245534
4941.1671
0.8754466
1.47
1.62
12.52%
11.98%

DCF Valuation
Without Synergy
FCF
PV of FCF
Terminal Value
Enterprise Value (from 2010)
less: Debt
add: Non operating Assets
Equity Value of Firm

Synergy Effect
$3014MM

1
252
225
7,670
1257.00
3061.00
9,474

With Synergies
Operating Income
EBIT x (1-tax)
Depreciation
WCInv
FCInv
Customer Attrition
Integration Charges
Increase in Operating Income
FCF
PV of FCF
Terminal Value
Enterprise value (excl 2009)
less: Debt
add: Non operating Assets
Equity Value of Firm

2
255
203

Intrinsic Value

3
375
267

4
456
290

5
491
279
6,405

12.83

1
141
101
536
-116
-268
-32
-536
(315)
(281)
10,684
703.00
3061.00
13,042

2
472
337
456
-36
-502

3
670
478
470
-46
-527

4
747
533
487
-34
-530

5
796
568
500
-34
-543

-250
514
519
414

514
889
633

514
970
617

514
1,005
571
8730

Intrinsic Value

17.66

Triangulation Graph
Comparable Companies
Dell
EMC
Hewlett-Packard
Intel
International Business Machines
NetApp
Median
MIN -MAX

EV/EBITDA

EV/Sales
3.5
8.8
6.9
2.4
7.1
15.6
7.00

2.4 - 15.6

0.23
1.55
0.83
0.88
1.52
1.29
1.09
0.23 - 1.55

EV of Sun based on
EV/EBITDA
EV/Sales
2,390.00
2896
5,956.94
19667
4,683.75
10459
1,652.81
11159
4,799.56
19196
10,577.67
16335

All multiples were multiplied with 2010E

figures of projected income statement.
DCF Valuation is plotted based on WACC
range 10% to 13%

Sensitivity Analysis

$ MM
Terminal Value Using EV/EBITDA
Terminal Value Using EV/Sales
Terminal Value Using FCF approach

5153.46
8781.93
6405.35

We can see from above analysis that as WACC reduces,

Enterprise value goes up and as Growth Rate reduces
Enterprise value goes down. Evidently, A higher growth
rate combined with lower WACC gives us a high
valuation.