Potential Acquirers for Sun: Oracle or Cisco?

Could Oracle (ORCL) or Cisco (CSCO) be potential acquirers for Sun Microsystems (JAVA), as talks between it and IBM are fading?

CSCO recently got involved into the computer server business, while ORCL has long been a close partner with Sun-- which specializes in making the kind of servers large companies use to run Oracle database software. With a huge cash pile of $29.5 billion, CSCO is a favorite among pundits looking for alternatives to IBM. Cisco could jumpstart its way into new computer hardware and storage businesses with Sun. Dell (DELL) or HPQ are very unlikely to express an interest in JAVA, since they're both committed to selling so-called industry-standard servers that run on microprocessors made by Intel (INTC) and Advanced Micro Devices (AMD).

IBM originally was talking to Sun about paying $10-$11 per share to buy Sun, but reportedly cut its offer to between $9.10 and $9.40 after due diligence, leading Sun to walk away. Currently at 6.50/share, JAVA must be feeling the pressure of having backed away from a lucrative deal with IBM. Moreover, JAVA's executive board members owe shareholders an explanation as to how their company is worth north of 10/share.

Depending on your level of patience tolerance, purchasing the shares at the current level of 6.50 and writing the May strike 5,6, or 7 may be very rewarding. If you're ultra-conservative, the "deep in the money" May strike 5 calls at 1.97/contract still offer an intrinsic value of .35/share, according to last Friday's close. That isn't an anemic return coupled with nearly 1.95/share downside protection!?

Let's examine May strike 6 and 7 for those who desire to earn more premiums on their contracts while having less downside protection to their underlying shares. At 6.50 /share, the May strike 6 calls are offered at 1.30 /contract for an intrinsic value of .90/contract. If the underlying shares get "called away" by option expiration (the third week of May), the investor would pocket .90/contract. If the shares remain below the strike price of 6, then the investor will keep the entire 1.30 /contract plus the shares. However, holding JAVA below 6/share provides the perfect bargain opportunity to accumulate additional shares and dollar cost-averaging. If IBM liked the Java at 9.33, wouldn't they be salivating to resume talks at 6 or below.

Similarly, the "out of the money" May strike 7 at nearly .80/contract provides the holder a juicy premium of .80/share as well as an .80 pullback.

Disclosure: Long JAVA

Comments

[Nom De Plum:]

If you think ORCL would buy JAVA, then I have to question your credibility. Has ORCL ever in its multi-decade history purchased a low margin hardware vendor? It looks like you got caught playing the speculated arb spread in JAVA and hoping someone takes you out of your long position.

Apr 13 10:56 AM

[Jack Haddad:]

No De Plum, I urge you to follow my trades as I post them in real-time. You might learn something.

Apr 13 11:52 AM

[desicon:]

Gone are the big margin business. With BPO, SAS and ASP model there is tremendous pressure on margins. Hence IBM and HP have built the one-stop business model. Oracle is not immune to the trend. One quick way to get there is build H/W portfolio by acquiring SUN and potentially others like Unisys and DELL. Oracle already has good consulting service business. Viola you have a one-stop shop.

Apr 13 02:34 PM

[M&A Hot Shot:]

ORCL? No way! ORCL's partnership with HPQ on the hardware side is something ORCL will not salvage. CSCO has the cash (>$33B USD) but they won't be stupid (at least I hope not) to dump ~$7B on JAVA, especially after their huge Scientific-Atlanta acquisition that hasn't done anything for them (ie: CSCO is still #2 to Motorola's STB division). Suffice to say, CSCO will not likely acquire any H/W companies in the next little while, with small consumer offerings (eg: Pure Digital - and terrible deal for CSCO, given that most smart phones in Q3/Q4 will have a video feature).

The IBM-JAVA deal will still happen, simply because no one else has expressed interest. When? That's anyone's guess. But I don't see a MSFT-YHOO-esque public drama.... err... unless, Carl Icahn has stake in JAVA. LOL! ;-)

Signed,

Corporate Development Insider

Apr 13 03:18 PM

[M&A Hot Shot:]

Oh yeah, and one more thing:

Dr. Haddad - you need to put the pipe down, my friend. Jim Cramer must be ROFL'ing reading your possible acquisition predictions. :-S

Apr 13 03:25 PM

[Jack Haddad:]

M&A, your point is well taken; appreciate the feedback.


On Apr 13 03:18 PM M&A Hot Shot wrote:

> ORCL? No way! ORCL's partnership with HPQ on the hardware side is
> something ORCL will not salvage. CSCO has the cash (>$33B USD) but
> they won't be stupid (at least I hope not) to dump ~$7B on JAVA,
> especially after their huge Scientific-Atlanta acquisition that hasn't
> done anything for them (ie: CSCO is still #2 to Motorola's STB division).
> Suffice to say, CSCO will not likely acquire any H/W companies in
> the next little while, with small consumer offerings (eg: Pure Digital
> - and terrible deal for CSCO, given that most smart phones in Q3/Q4
> will have a video feature).
>
> The IBM-JAVA deal will still happen, simply because no one else has
> expressed interest. When? That's anyone's guess. But I don't see
> a MSFT-YHOO-esque public drama.... err... unless, Carl Icahn has
> stake in JAVA. LOL! ;-)
>
> Signed,
>
> Corporate Development Insider

Apr 13 11:30 PM

[Moon Kil Woong:]

If anyone buys them they will probably loose. Thus, so far no one will buy them. I honestly don't expect anything on the horizon for them in terms of buyout deals. I think it's a sunset not a sunrise for them.

Apr 14 08:12 AM

[BeachRider:]

SPARC in a post-sale mode is hard to envision for IBM or HP. DELL & CSCO is not going to jump-into this. INTC or AMD might see some value in it, though.

The Open Source mirrors the hardware. IBM & HP could use it (a little more valuable to IBM). CSCO & DELL aren't in this business, now. INTC & AMD would have little/no interest.

ORCL fugedaboudit.

Apr 14 01:06 PM

[desicon:]

SUN acquisition has to be looked at two diametrically opposite lights. The dominant reason IBM, HPQ and maybe even DELL looks at SUN is from the efficiency standpoint. By acquiring SUN they get to increase the customer base, bring management discipline, cut cost and maybe monetize under utilized product areas, whereas the reason CSCO and ORCL is to create/assemble a competing alternative to the IBM and HPQ. In the second case SUN is core to the strategy and one of many acquisitions to follow. If neither is the case then SUN will join the heavenly bodies such as Wang, Prime, Data General, DEC and most recently SGI.

Apr 14 05:02 PM

[M&A Hot Shot:]

Good post, decision. I concur with you to a broader extent.

We can safely rule out HPQ & DELL as potential acquires, simply because they are both on the INTC ship.

From a competition and regulatory standpoint, the IBM-JAVA deal is an anti-trust investigation waiting to happen. Not only IBM will have to convince the US DOJ, but also they face potential hurdles with the EU and various other regulators in foreign jurisdictions, simply because both IBM and JAVA will gain a stronghold in two huge areas - the Server and OS (IBM's AIX & JAVA's Solaris). (Mind you, I'm not an expert in this area, and I'm just basing my comments on anti-trust caselaw with respect to M&A deals that I had read during my law school days).

From a business vantage standpoint, IBM stands to gain the most if they were to acquire JAVA. ORCL has got its own problems in the merger acquisition arena (see: Middleware fiasco with integrating BEA's products; and Fusion is a massive failure), so last thing ORCL wants is another huge multi-billion dollar acquisition and more headache, their lack of cash flow notwithstanding. As for CSCO's entry in the data center space, it's really too early to tell, but no doubt CSCO wants to acquire VMW (but that can't happen without EMC), and no way CSCO will acquire BMC despite their exclusive partnership with them.

Apr 14 05:54 PM

[Between The...:]

CSCO is planning on making significant inroads into the server space to create a IT solution pairing their networking hardware business with a low-end server hardware play. They aren't doing the true R&D on the hardware development side, just outsourcing the design and selling the product. Buying Sun would give them the actual hardware and OS engineering skill to own the design and more of the solution. Solaris OS on Sun HW paired with Cisco networking is already common in datacenters across the world, so there is some synergy to be had with the two companies. However, Sun's hardware line is not profitable and SPARC is soon to go the way of Alpha, PA-RISC, and other specialized CPU designs and no acquirer (HPQ has Itanium, IBM has Power) would keep it alive given their existing portfolio. Commodity x86 hardware will be Cisco's push, and Sun has some ability there and a user base in Solaris. Java has not made Sun anything over the decades, and the end users have even less need than ever to run a diverse range of apps across platforms (Java's supposed strength) due to the explosion of web-based tools like Google Apps.
Finally, Sun does have lots of cash ($2B+), a decent customer base, many patents/IP, and lots of valuable land/buildings in silicon valley. If IBM wanted to just buy a competitor, take the customer base, integrate the IP, and shut the rest down, there would be a reasonable price to do so (not sure what - maybe current market valuation of 6.50/share?).

Apr 14 08:53 PM

[Bandwagon2009:]

At some level companies should be aloud to die a graceful death. Sun was a creative / dynamic / well run company at one time.

But in any case if we are speculating...here are a couple of ideas:

1. EMC -- it has some businesses with compete but at one level it would be complementary. And EMC certainly knows how to deal with the hardware part...and it would be ironic (remember Data General!)

2. Any of the tier 2 firms in this space -- Fujitsu, Hitachi, NEC, Unisys, NCR...it would certainly make for an interesting drama

3. HP -- grab the rest -- cultures are probably a better match than big blue, and might be cheaper from an integration standpoint

4. Microsoft -- LOL -- would be fun!

Apr 14 09:02 PM

[Lightway:]

Alot of great comments here already.

I'm not sure why Sun walked away from the deal, but IBM was their best shot period for a buyout. The only reason I can chalk up this terrible decision was hubris, a cultural trait throughout the ranks at Sun. I firmly believe Sun management still thinks it is 1998, times have changed, they were very slow to react to the .com bubble bursting, and seemed to be making headway around 2005, but then sputtered and now the newest downturn has decimated them.

Like others, I'm starting to see them within the same ranks as DEC and SGI, they are at a critical point in their life and it will be interesting to see where they go.

Sun was smart to start pushing Solaris back into the Intel processor space. Solaris is still years ahead of Linux, and it would be a shame to see it go. This would be a good reason for Cisco to pair up with them, as Solaris x64 has even gotten certification from big vendors like SAP as of late.

Even in 1997, industry giant Apple was being put on the deathwatch, but they came back strong and are now considered one of the tech bellwethers.

Microsoft took a big stake in the company back then, and I am wondering if it makes any sense for any of the big companies to take a minor ownership role? I'm just not seeing the synergy in any of these cases, as there is way too much overlap between HPQ and IBM, though, the Compaq hardware over at HP does work very well.

On Apr 14 05:02 PM desicon wrote:

> SUN acquisition has to be looked at two diametrically opposite lights.
> The dominant reason IBM, HPQ and maybe even DELL looks at SUN is
> from the efficiency standpoint. By acquiring SUN they get to increase
> the customer base, bring management discipline, cut cost and maybe
> monetize under utilized product areas, whereas the reason CSCO and
> ORCL is to create/assemble a competing alternative to the IBM and
> HPQ. In the second case SUN is core to the strategy and one of many
> acquisitions to follow. If neither is the case then SUN will join
> the heavenly bodies such as Wang, Prime, Data General, DEC and most
> recently SGI.

Apr 16 10:18 AM

[M&A Hot Shot:]

I agree wholeheartedly - this is a good M&A discussion, indeed.

Now that that CSCO has entered the data center market - both dominated by key CSCO partners HPQ & IBM - HPQ has boosted their ProCurve unit, and IBM is making exclusive deals with CSCO competitor.

Any one here thinks IBM (or HPQ) will pick-up Brocade (for dat switching), Riverbed (for WAN), etc. and give CSCO some serious competition in their dominant space?

Sidebar ---- I heard from a reliable and credible source that HPQ was in the process of "valuating" and doing "external due diligence" on HPQ. Anyone have any info on that? An HPQ-ALU deal would really SPICE things up!

Apr 16 08:10 PM

[Jack Haddad:]

Did I really get caught playing that ARB spread? Do i have any credibility. Once again, follow my trades closely... You'll be rewarded.


On Apr 13 10:56 AM Nom De Plum wrote:

> If you think ORCL would buy JAVA, then I have to question your credibility.
> Has ORCL ever in its multi-decade history purchased a low margin
> hardware vendor? It looks like you got caught playing the speculated
> arb spread in JAVA and hoping someone takes you out of your long
> position.

Apr 20 09:51 AM

[Jack Haddad:]

Any additional comments?


On Apr 13 03:18 PM M&A Hot Shot wrote:

> ORCL? No way! ORCL's partnership with HPQ on the hardware side is
> something ORCL will not salvage. CSCO has the cash (>$33B USD) but
> they won't be stupid (at least I hope not) to dump ~$7B on JAVA,
> especially after their huge Scientific-Atlanta acquisition that hasn't
> done anything for them (ie: CSCO is still #2 to Motorola's STB division).
> Suffice to say, CSCO will not likely acquire any H/W companies in
> the next little while, with small consumer offerings (eg: Pure Digital
> - and terrible deal for CSCO, given that most smart phones in Q3/Q4
> will have a video feature).
>
> The IBM-JAVA deal will still happen, simply because no one else has
> expressed interest. When? That's anyone's guess. But I don't see
> a MSFT-YHOO-esque public drama.... err... unless, Carl Icahn has
> stake in JAVA. LOL! ;-)
>
> Signed,
>
> Corporate Development Insider

Apr 20 09:53 AM

[M&A Hot Shot:]

I have to hand it to Dr. Haddad on this one. Well done, kind Sir. :-)

The ORCL-JAVA deal caught us all off-guard. Granted, for those of us (most of us at least) who weren't privy to insider talks, we could have have never guessed.

At least, I got it right on CSCO. :-P LOL!

Seriously though, this is a HUGE FIRST ---- ORCL acquiring a hardware co (but I guess they'll get an OS like Solaris too), but more importantly, as I've stated above, give ORCL's hardware deal with HPQ, this is bound to create some tension.

Also, not sure how the US DOJ will react, but I don't suppose there is much anti-trust issues here.

Again, kudos to the venerable Dr. Haddad! Good call.

Apr 20 01:40 PM

[Full Tester:]

Oracle bought Sun... ^^

Apr 20 02:21 PM

[Jack Haddad:]

I thank you for the vote of confidence!


On Apr 20 01:40 PM M&A Hot Shot wrote:

> I have to hand it to Dr. Haddad on this one. Well done, kind Sir.
> :-)
>
> The ORCL-JAVA deal caught us all off-guard. Granted, for those of
> us (most of us at least) who weren't privy to insider talks, we could
> have have never guessed.
>
> At least, I got it right on CSCO. :-P LOL!
>
> Seriously though, this is a HUGE FIRST ---- ORCL acquiring a hardware
> co (but I guess they'll get an OS like Solaris too), but more importantly,
> as I've stated above, give ORCL's hardware deal with HPQ, this is
> bound to create some tension.
>
> Also, not sure how the US DOJ will react, but I don't suppose there
> is much anti-trust issues here.
>
> Again, kudos to the venerable Dr. Haddad! Good call.
>
>

Apr 20 02:55 PM

[M&A Hot Shot:]

I wonder if ORCL's Corp. Dev. guys were somewhat (indirectly) influenced by this blog. :-D Because if you look at the time frame, when the IBM-JAVA deal collapsed, ORCL must have had only a limited window of time to make a proposition (or vice-versa if JAVA had approached ORCL) ---- unless of course, ORCL and JAVA were in talks before.

Either way, it's all water under the bridge now. Dr. Haddad got this one right on the dollar.

Hey Doctor, can you get me an M&A job inside CSCO or at any other Silicon Valley F100's Corp. Dev. unit? You obviously seem to be connected. You should consider insider trading! ;-) LOL! Just kiddin', of course.

Apr 20 03:17 PM

[Jack Haddad:]

LOL... I wish if i can or had an insider access


On Apr 20 03:17 PM M&A Hot Shot wrote:

> I wonder if ORCL's Corp. Dev. guys were somewhat (indirectly) influenced
> by this blog. :-D Because if you look at the time frame, when the
> IBM-JAVA deal collapsed, ORCL must have had only a limited window
> of time to make a proposition (or vice-versa if JAVA had approached
> ORCL) ---- unless of course, ORCL and JAVA were in talks before.
>
>
> Either way, it's all water under the bridge now. Dr. Haddad got this
> one right on the dollar.
>
> Hey Doctor, can you get me an M&A job inside CSCO or at any other
> Silicon Valley F100's Corp. Dev. unit? You obviously seem to be connected.
> You should consider insider trading! ;-) LOL! Just kiddin', of course.

Apr 20 04:19 PM

[M&A Hot Shot:]

Next time I'm in the San Jose/Bay Area, I definitely wanna go clubbing with the invincible one - the legendary Dr. Haddad.

Doc, you bring the insider M&A activity tips; I'll supply the hordes of smokin' hot young babes (your wife doesn't have to know!). We'll party it up! ;-)

Apr 24 03:21 PM

[Jack Haddad:]

lol....


On Apr 24 03:21 PM M&A Hot Shot wrote:

> Next time I'm in the San Jose/Bay Area, I definitely wanna go clubbing
> with the invincible one - the legendary Dr. Haddad.
>
> Doc, you bring the insider M&A activity tips; I'll supply the
> hordes of smokin' hot young babes (your wife doesn't have to know!).
> We'll party it up! ;-)

Apr 25 01:18 AM

[M&A Hot Shot:]

Now that ORCL is in process of acquiring JAVA, the word on the street is... that IBM might be making a move for RHT.

Dr. Haddad or anyone else here, any insights on this possible deal?

When the IBM-JAVA talks were in progress (very much so in the public light), it was suggested that ORCL would make a big for RHT (of course all this was speculative and therefore credulous).

If true, IBM could swallow RHT given that their M-CAP is ~3.45B USD - half of what ORCL paid for JAVA.

Apr 26 02:39 AM

[M&A Hot Shot:]

HPQ tried to buy JAVA, while they were still courting IBM and ORCL.

blogs.wsj.com/digits/2.../#

Boy, JAVA's like a big-time 'playa'.

May 12 05:57 PM

[M&A Hot Shot:]

Who was "Party B"?!?!?!

blogs.barrons.com/tech.../

May 13 12:15 PM