I need all the calculation detail for this case Sun Mircrosystem, would you be able to help? I the case solution said about the exhibit xx.. But none of them is attached,

Financial Administration 5713 Case 48: Sun Microsystems Minh Bui Team 1 Table of Content Problem Identification................................................................................. 2 Possible Solution........................................................................................ Analysis of Solution.................................................................................... Conclusion/Summary................................................................................... Final Recommendation................................................................................. Specific Plan of Implementation....................................................................... I. Problem Identification 3 In 2009, Oracle was preparing an acquisition with Sun Microsystems. Oracle put in an offer of $7.38 billion, or $9.5 per share, which was 40% higher than Sun's currently traded price, $6.69. During the time, Sun was in a declining stage when its 2009 revenue was expected to drop by 17.5% while its stock performance was at -61.5% since March of 2008. Oracle was a giant technology company which supplied software for enterprise information management. Its key products contained relational databases, middleware software, applications, and related services. On the other hand, Sun Microsystems provided products, services, and support for building and maintaining enterprise network computing environment. The acquisition would combine Oracle's dominant position in the software space with Sun's expertise in hardware and networking. Oracle hoped to capitalize on Sun's decline by getting specific assets or the entire company at the deflated price. The main problem that Oracle had to face was to create an accurate valuation model to come up with a fair price for Sun Microsystems. Moreover, Oracle had to ensure that acquiring Sun would bring benefits and efficiency to the operation. II. Possible Solution In the valuation process for Sun, discounted cash flows would be a possible method. Sun's income statement would be projected for a 6-year period from 2008 to 2014. Free cash flows and terminal value would be calculated and discounted by WACC as a discounted rate. Moreover, the estimation of firm's equity value would be a benchmark for Oracle to verify its offering price. Besides coming up with a fair price, more qualitative arguments must be present to show the positive impacts of the acquisition on Oracle. III. Analysis of Solution 1. Industry analysis 4 Hardware and software were the two main segments of the industry. From 2004 to 2008, the hardware industry grew at the rate of 2-4% each year. In 2008, 29.2% of hardware sales were the servers and networking products. On the other hand, the software sales growth rates were fluctuating around -2% to 2%, indicating that the segment had reached the maturity stage in the product cycles. This was considered a slow growth and tough period for small tech corporations to sustain its bottom line. Nevertheless, there were many opportunities for giant tech companies to look for low-cost acquisitions for expansions. In this case, Sun Microsystems was struggling in the past years when it lost customers to rivals such as IBM, Dell, and HP. At the same time, Oracle constantly maintained its incredibly high profit margin of 25% and armed with more than $8 billion in cash for \"shopping.\" 2. Sun's WACC estimation Sun's market value of equity was $4.9 billion, or 79.66% of the firm' value. Cost of equity was estimated by using the CAPM model. Sun's beta was given at 1.73 which was relatively high compared to its peer tech company, indicating that investing in Sun was risky investment. The 30-Year Treasury bond yield of 3.66% was used for risk free rate because it was a safe assumption that the US would not default. Technology was always a high growth industry which outperformed other industry and the macro economy as a whole; moreover, the economy was suffering through the 2009 recession, I estimated the market risk to be 10%. From the CAPM model, the cost of equity was calculated at 15.24% In 2008, Sun had $1.26 billion of long-term debt, or 20.37% of the firm's value. According to Moody's rating, Sun Microsystems had its bond rating at Ba1 (or BB+ for S&P rating). The corporate bond yield of equivalent ratings corporation was 11.42%. As a result, I used 11.42% as a cost of debt. 5 Finally, the weighted average cost of capital (WACC) was calculated at 14.46%. This rate was used as a discounted rate to estimate the firm value. 3. Sun's equity value Exhibit 1 in the last page shows the forecasted income statement of Sun Microsystems. In addition, I added a few calculations to come up with the FCF of the company. The FCF formula is: FCF = EBT + Depreciation - Change in Working Capital - Change in Capex In this case, I added depreciation expense back to operating income and subtracted the change in investment of PP&E. There was not enough information to estimate the working capital because there were large fluctuations in current assets and current liabilities in the past years without any justification. As a result, I omitted working capital in the calculation. From exhibit 1, it showed that the Sun performed poorly during the recession in 2009. But it shows improvements in the following five years by generating positive cash flows at the increasing rate. The next important task was to estimate the constant growth rate (g) for Sun Microsystems. Exhibit 2 in the last page shows the sensitivity analysis of Sun with different constant growth rates in the range from 2% to 8% which indicated the worst and the best scenarios. At the rate of 6%, the company's stock price was $9.64 per share which was approximately equaled to Oracle offering price, $9.5 per share. 6 IV. Conclusion/Summary Merging with Sun Microsystems would add the prized Java, MySQL, and Solaris platforms to Oracle's portfolio. The move possibly created cannibalization on Oracle's software, but the real effects was minimal because different software uncompetitively appealed to different customers. With Sun's support, Oracle could expand its market share to the lower-end customers that Oracle had never dealt with before. The combination of the two R&D departments would fasten the product pipeline process. Exadata, a machine that could handle both online transaction and data warehousing, was an important project of Oracle. With Sun's hardware support, the machine would be twice as fast as its predecessor with high probability, and much faster than IBM's. Sun Microsystems possessed a relatively high WACC, 14.46%, indicating that investing in Sun would yield attractive return along with high risk. In my opinion, it was reasonable for Sun to reach a 6% constant growth rate after the next six years. Technology was always a high growth industry; moreover, Oracle was in a strong position in both finance and market shares; Oracle could possibly support Sun to overcome recession. I believe Oracle's offering price at 9.5% was a fair price. V. Final Recommendation The acquisition was a mutual profit for both Oracle and Sun Microsystems. Acquiring Sun was a strategically great opportunity for Oracle's expansion in market shares and brand awareness to a long range of customers. Oracle must seriously consider the facts and all benefits that Sun would offer. 7 VI. Specific Plan of Implementation I recommend Oracle to closely follow the IBM's move to negotiate with Sun. On the other hand, engaging in to an acquisition would strongly benefit Sun. The company had options to merge in with either Oracle or IBM. Sun must also consider IBM's offer, even though IBM's offering price was only 1% less than Oracle's offer. The long-term profit that IBM would bring to Sun may be much more valuable than the bid price. Sun should lay out a comparison of advantages and disadvantages for both Oracle and IBM to see which company would generate more profit for its operation