Sun Microsystems: Buy on Regulatory Risk-Driven Stock Weakness

Includes: JAVA, ORCL
by: Panta Capital

After Oracle Corporation (NYSE:ORCL) agreed to buy Sun Microsystems (JAVA) on 20-Apr-09 for $9.5 cash per share, the closing of the deal remains subject to both US DoJ and EC competition approvals. Given the presence of significant competition from various participants in every market where both Sun and Oracle operate and compete, we strongly believe that both regulators will ultimately approve the deal.

However, timing risk exists on Oracle's statement that it will be able to complete the transaction before the end of the summer: First, Oracle announced on 26-Jun-09 that the US DoJ requested additional information regarding the transaction and that it expected to be able to resolve the antitrust issues in approximately 8 weeks (i.e. before the end of August). Secondly Sun and Oracle filed their merger application with the EC on 30-Jul-09, indicating a provisional deadline for a Phase I decision on 03-Sep-09.

From both the DoJ and EC's perspective there is an increased unlikelihood of a late August/early September closing of the deal:

  1. Given that most DoJ antitrust review processes last about 3 months from the date of the request for additional information, we would find an end of September decision more likely than Oracle's aggressive end of August indication.
  2. Given a) the complexity of the vertical issues of a Sun-Oracle combination; b) the number of questions that will be raised by European competitors and programmers surrounding the licensing of Java and MySQL; and c) the current European holiday period, there is a strong possibility that the EC might launch a Phase II investigation, adding a possible extra 90 trading days to the timetable.

We believe that ultimately the deal will close, in a worst case scenario by the end of 2009, and would be buying (more) if/when Sun's share price falls towards/under $9 per share levels (or 5.6% merger spread) on regulatory delay announcements.

Disclosure: Long JAVA