Why Did Sun Strike This Deal With KKR?

Includes: JAVA, KPEQF
by: Paul Kedrosky

Lots of people are continuing to speculate on why Sun Microsystems (NASDAQ:SUNW), with $2.68-billion on its balance sheet, would want a mere $700-million convertible debt from KKR (OTC:KPEQF).

The most obvious answer, of course, is a combination of "because it can", and "because it may have had little choice". With better cash flow, an ardor for acquisitions, and some longstanding interest in the company from private equity sorts, KKR thinks it can make money on the investment, and Sun thinks it can use the money to help with some purchases.

At the same time, this was almost certainly planned as a species of deterrence. The money keeps other private equity firms at bay -- no-one is going to pester Sun to be acquired at low-low prices with KKR sitting in senior debt and having a $7.21 convertible -- so Sun can get on with business without having to deal with aggressive, low-balling suitors every five minutes, as will likely have been the case in the last twenty-four months.