On Monday Oracle (ORCL) announced that it has entered a definitive agreement to buy Sun Microsystems (JAVA) in cash for $9.5 per share. Sun shares jumped over 35% on the news and have now settled near $9.10. Oracle was an unexpected acquirer for Sun, thus a pleasant surprise for Sun CEO Jonathan Schwartz since his company had just recently lost a potential takeover deal from IBM.
But Larry Ellison has come to the rescue, putting Oracle in the hardware business for the first time. Why? In the future, he hopes to offer integrated hardware and software solutions to his customers. But there's software as well. On this deal’s related conference call he explained that Sun's Java “is the single most important software that we’ve ever acquired”. Much of Oracle’s software services use Java.
In terms of near term earnings, Oracle believes that the deal will be immediately accretive to ORCL earnings to the tune of “at least” 15 cents for the first full year post deal closing. They stress that this amount of accretive earnings amounts to more than they had planned for the first year of their BEA, Siebel Systems, and Peoplesoft acquisitions combined.
In terms of ability to complete this deal, Oracle is nearly net cash and its business is relatively healthy despite the economic downturn, thus should easily be able to finance the acquisition.
Thus regulatory risk and potential deal closing time probably the key variables to be watching for this arb. Should the deal close within the next five months, then there is potentially a decent spread remaining to be captured despite the run-up-on-news today.
Arbitrage metrics shown below.
