Running The Numbers - Sun ($JAVA) Needs IBM ($IBM)
Last weekend IBM ($IBM) withdrew their acquisition offer for Sun Microsystems ($JAVA). Pre-offer $JAVA had not traded over US$6.00 since October last year. The original $IBM offer was at US$9.55 (subsequently dropped to US$9.40). With this offer $IBM was valuing $JAVA not as a standalone business - but as part of a combined entity. The premium to the pre-offer share price represented the synergies $IBM believed they could achieve with the acquisition (additional revenues opportunities - but more likely expense savings). These synergies are what allowed $IBM to make the offer they did. Upon announcement of the offer the $JAVA shares traded as high as US$9.27. With the withdrawal of the offer the shares fell back to close at $6.56 on 6 April - now US$6.68. So what does a valuation of $JAVA as a standalone business look like? This is the way to examine $JAVA - to compare with a US$9.40 offer from $IBM.
Valuecruncher Interactive Analyst Report For $JAVA - New Format
Valuecruncher produces a valuation of US$6.44 for $JAVA. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 3.6% below the current share price of US$6.68. It is 31.5% below the US$9.40 $IBM offer.
Assumptions
- Revenue: Reuters aggregates 15 analysts covering $JAVA and the mean estimates of 2009 and 2010 revenues are US$12.4 billion and US$12.2 billion respectively. For our analysis we have used US$12.4 billion in 2009, US$12.2 billion in 2010 and US$12.0 billion in 2011.
- Profitability: We have used an EBITDA margin of 4.5% in 2009 rising to 5.5% in 2010 and beyond. Reuters has $JAVA‘s EBITD margin at -7.5% last year and an average of 5.5% over the last five-years.
- Capital Expenditure: We have assumed capital expenditures of US$550.0 million in 2009 then US$450.0 million per annum moving forward.
- Discount Rate: 10.0%.
- Terminal Growth Rate: 3.0%.
Our analysis incorporates the cash and debt on the $JAVA balance sheet – Valuecruncher calculates a net debt number.
Based on our numbers - the $IBM offer looks very attractive for $JAVA shareholders. Play with our assumptions – what does your analysis say? Our model is interactive - you can change any of our assumptions.
Disclosure: None