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Impacts of Oracle's Acquisition of Sun Microsystems

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Impacts of Oracle's acquisition of Sun Microsystems


Oracle is a software development and marketing organization specializing mainly in database management systems. The organization has significantly enlarged its market share through internal growth and acquisitions. Oracle announced its first dividend payment on March 18 last year since going public. A month later, the organization announced that it would acquire Sun Microsystems, a firm that provided standards based computing infrastructure, enterprise computing systems, software applications and storage facilities. Moreover, Sun Microsystems was a major proponent of open source systems especially UNIX operating system (Oracle Corporation, 2009).

This essay examines the impacts of the acquisition on both Oracle and Suns Microsystems using the theories and principles of Corporate Finance. Mergers and acquisition are important in corporate finance. They bring together separate companies to form one company mainly, but not always, as an expansion strategy. The terms mergers and acquisition are different, though frequently used as synonyms. An acquisition occurs when a company takes over another and the target company ceases to exist. On the other hand, a merger occurs when two firms come together to form a new company (Investopedia, 2008).


The rapidly evolving high technology sector motivated Oracle to seek the acquisition of Sun Microsystems so as to gain strategic assets mainly in the form of intellectual properties (Investopedia, 2008). The deal was an intellectual property motivated acquisition. Oracle's strategy was to use Sun Microsystems' technologies such as SPARC to penetrate into the hardware market (Oracle Corporation, 2009). Oracle has a good track record of innovation and creativity and will effectively combine Sun Microsystems' technologies with its technologies to develop competitive products capable of adding value to shareholders wealth. The Sun Microsystems' shareholders earned positive returns after the acquisition was finalized considering the financial position of the corporation before the deal. The value of their shares increased from $3 in November 2008 when the corporation was seeking buyers to buy their business to $6.69 when the market was anticipating a deal with IBM and finally, their shares were bought at $9.50 per share by Oracle.

Oracle announced its first dividend on March 18 2009 prompting its stocks to go up from $15.83 to $17.37 the next day. This was mainly done to raise the market expectation of Oracle's stocks before the announcement of Sun Microsystems acquisition a month later (Oracle Corporation, 2009). Before the deal, Sun Microsystems was going through a financial crisis and registered a loss of $200 million at the quarter ends in December 2008 with a stock price of about $3 per share. By this time Sun Microsystems was seeking buyers to sell its business. In May 2009, it seemed that IBM would strike a deal with Sun Microsystems. Sun Microsystems' investors were excited about the possible deal so the stock prices of Suns Microsystems increased to $6.69 per share. On April 20, the deal between Sun Microsystems and Oracle was announced. In the deal Oracle would pay $9.50 per share in cash in order to acquire Sun Microsystems (Oracle Corporation, 2009).

Immediately the deal was announced Oracle's stock prices dropped by about 1.2 percent. Oracle investors were worried about acquiring a firm that was incurring losses. In addition, they doubted Oracle's capability to run Sun Microsystems' businesses. On the other hand, Sun Microsystems' investors were satisfied with the deal. The investors were relieved from worrying about the Corporation's uncertain future. On January 27, 2010 Oracle Corporation acquired Sun Microsystems for US$7.4 billion based on the agreement signed the previous year (Oracle Corporation, 2009).

Different stakeholders are affected differently by mergers and acquisitions (Gaughan, 1999). The success of the acquisition of Sun Microsystems by Oracle can only be measured by how Oracle's shares are enhanced by the action. However, it will take time before the effects of the acquisition can be seen. The acquisition of Sun Microsystems by Oracle added value to the shareholders of Sun Microsystems. In the deal oracle paid US $9.50 per share in cash. This is a huge gain to Sun Microsystems' shareholders considering the corporation registered a loss of $200 million in the year 2008 and faced uncertain future.

In addition, just before the announcement of the deal, Sun Microsystems' shares were selling at around $6.69 per share yet Oracle paid $9.50 per share in the deal. This is a reasonable purchase price considering the fact that in November 2008 Sun Microsystems shares were selling at around $3 per share (Oracle Corporation, 2009). Finally, Oracle paid for the deal in cash. This suggests that the deal was fair because companies that pay in cash to acquire others tend to be careful when calculating bids. As a result valuation usually comes closer to the target contrary to when stock is used as the currency of acquisition (Investopedia, 2008). Sun Microsystems' shareholders therefore benefited from the deal because the corporation was facing uncertain future and the threat of going bankrupt and could not have increased investments in its intellectual property assets to make them more competitive.

Oracle acquired a company that was in a business it knew intimately. The acquisition of Sun Microsystems will thus enable Oracle to grow and enjoy synergistic and diversification benefits. This has the potential of enhancing shareholders' wealth. The acquisition represented an opportunity for



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