16.4.09

Potential Acquirers for Sun: Oracle or Cisco?

Could Oracle (ORCL) or Cisco (CSCO) be potential acquirers for Sun Microsystems (JAVA), as talks between it and IBM are fading?

CSCO recently got involved into the computer server business, while ORCL has long been a close partner with Sun-- which specializes in making the kind of servers large companies use to run Oracle database software. With a huge cash pile of $29.5 billion, CSCO is a favorite among pundits looking for alternatives to IBM. Cisco could jumpstart its way into new computer hardware and storage businesses with Sun. Dell (DELL) or HPQ are very unlikely to express an interest in JAVA, since they're both committed to selling so-called industry-standard servers that run on microprocessors made by Intel (INTC) and Advanced Micro Devices (AMD).

IBM originally was talking to Sun about paying $10-$11 per share to buy Sun, but reportedly cut its offer to between $9.10 and $9.40 after due diligence, leading Sun to walk away. Currently at 6.50/share, JAVA must be feeling the pressure of having backed away from a lucrative deal with IBM. Moreover, JAVA's executive board members owe shareholders an explanation as to how their company is worth north of 10/share.
Depending on your level of patience tolerance, purchasing the shares at the current level of 6.50 and writing the May strike 5,6, or 7 may be very rewarding. If you're ultra-conservative, the "deep in the money" May strike 5 calls at 1.97/contract still offer an intrinsic value of .35/share, according to last Friday's close. That isn't an anemic return coupled with nearly 1.95/share downside protection!?

Let's examine May strike 6 and 7 for those who desire to earn more premiums on their contracts while having less downside protection to their underlying shares. At 6.50 /share, the May strike 6 calls are offered at 1.30 /contract for an intrinsic value of .90/contract. If the underlying shares get "called away" by option expiration (the third week of May), the investor would pocket .90/contract. If the shares remain below the strike price of 6, then the investor will keep the entire 1.30 /contract plus the shares. However, holding JAVA below 6/share provides the perfect bargain opportunity to accumulate additional shares and dollar cost-averaging. If IBM liked the Java at 9.33, wouldn't they be salivating to resume talks at 6 or below.
Similarly, the "out of the money" May strike 7 at nearly .80/contract provides the holder a juicy premium of .80/share as well as an .80 pullback.

Author: Jack Haddad @ http://seekingalpha.com

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