Fitch Affirms Oracle's Ratings at A/F1 on Merger

Fitch Ratings has affirmed the ratings of Oracle, following the announcement that Oracle will purchase Sun Microsystems.

The ratings are affirmed as follows: --Issuer Default Rating (IDR) at 'A'; --Senior unsecured debt at 'A'; --Short-term IDR at 'F1'; --Commercial Paper (CP) at 'F1'.

The Rating Outlook is Stable.

The affirmation follows the announcement that Oracle will purchase Sun, for approximately $8.7 billion, including $1.3 billion of assumed debt ($5.6 billion net of cash and debt acquired). The Board of Directors of Sun has unanimously approved the transaction, which is anticipated to close by the summer of 2009, subject to Sun stockholder approval, certain regulatory approvals and customary closing conditions.

The affirmation incorporates Fitch's expectations that Oracle will fund the acquisition with a mixture of cash, CP borrowings and long-term debt issuance, with the majority being funded with debt, given that most of the company's cash is located outside the U.S. While credit protection measures are expected to deteriorate as a result of this transaction, Fitch believes Oracle retains solid financial flexibility at its current ratings, which incorporate total leverage of approximately 1.5 times (x) given the company's current operating profile. Fitch anticipates Oracle will continue to pursue an aggressive acquisition strategy, which could temporarily drive leverage outside of expectations. However, in line with past transactions, the company is expected to refrain from meaningful share repurchases and use significant free cash flow to reduce debt incurred in the transaction.

Fitch believes that materially weaker credit metrics over an extended period from a failed integration of Sun, a more aggressive financial policy, or a significantly worse impact of the weak macroeconomic environment, could result in negative ratings actions.

Concerns for the transaction center on greater integration risk associated with Oracle's purchase of Sun due to Sun's sizable employee base (33,000 at year-end 2008) and broad and diverse product portfolio, including a significant hardware segment. Additionally, uncertainty exists regarding potential segment/product divestitures, management structure and product strategy, particularly regarding open source software (e.g. MySQL). Positively, Fitch believes that Oracle can achieve significant cost synergies, primarily general and administrative expenses. Also, Oracle should be able to able to derive incremental benefits from Sun's sizable customer base and large intellectual property portfolio (e.g. Solaris and Java software platforms).

For the latest 12 months (LTM) ended Dec. 28, 2008, Sun generated total revenue, operating EBITDA and free cash flow of $13.3 billion, $1 billion (7.7 percent margin) and $8 million, respectively. Fitch estimates server systems, storage, software, and services accounted for approximately 39 percent, 17 percent , 5 percent and 39 percent of Sun's total revenue in the LTM period, respectively.

Pro forma for the recently initiated $1 billion dividend, Fitch estimates that Oracle's free cash flow for the LTM ended Feb. 28, was $7 billion, providing the company with significant financial flexibility for this transaction. Fitch said it believes that cash restructuring payments associated with the transaction and a pressured operating environment could have a slight impact on free cash flow in subsequent years, although the cash generating capability of the underlying business is expected to remain strong.

Oracle's credit metrics are expected to deteriorate upon the transactions close as Fitch estimates leverage could increase to approximately 1.4x from 1.0x from additional debt associated with the acquisition and interest coverage declining to approximately 12x from 18x, assuming 100 percent of the transaction is debt financed.

As of Feb. 28, Oracle's cash and cash equivalents were approximately $11.3 billion, of which approximately $10.1 billion was held by foreign subsidiaries. In addition, Oracle has an undrawn $5 billion CP program backed by a $3 billion revolving credit facility expiring March 2011, and a $2 billion 364-day facility expiring March 2010 (which the company entered into upon expiration of the previous $2 billion facility in March 2009).

Total debt as of Feb. 28, was approximately $11.2 billion and consisted primarily of $1 billion of floating- rate senior notes due May 2009, $1 billion of floating-rate senior notes due May 2010, $2.25 billion of 5 percent senior notes due January 2011, $1.25 billion of 4.95 percent senior notes due April 2013, $2 billion of 5.25 percent senior notes due January 2016, $2.5 billion of 5.75 percent senior notes due April 2018, and $1.25 billion of senior notes due April 2038.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, fitchratings.com.

Comments on this story may be sent to newsdesk@closeupmedia.com

Source: www.tmcnet.com

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More thoughts on Oracle and hardware

There are two explanations making the rounds for Oracle’s unexpected entry into the hardware business. Neither on its own is wholly convincing, but each hints at what is probably really going on here.

The first is the explanation that Oracle was putting about on Monday. This holds that vertical integration of all aspects of hardware and software is the next step being demanded by the customers of enterprise technology companies, who want one throat to choke when something goes wrong.

But it hardly feels as though customer expectations have changed enough to force Oracle to buy a deeply troubled server company to take on entrenched rivals like IBM, HP and now Cisco. Not does this explanation take account of the fundamental nature of the enterprise technology industry, which relies on deep technology and business partnerships.

The other explanation is that Oracle had to move quickly to outmaneuver the slow-footed IBM, so it was willing to take on the unappealing hardware business just to get its hands on Sun’s software assets. It then follows, according to this view, that Oracle will now turn around and unload the hardware side as soon as it can, perhaps in pieces.

To judge from the people we’ve spoken to, neither of these explanations quite gets to the bottom of what is going on.

One good pragmatic reason for assuming Sun’s struggling hardware business is that, for the arch cost-cutters at Oracle, this is where many of the biggest opportunities for expense savings lie. Oracle has promised $1.5bn in operating profits from the Sun deal in the first year. Slashing hardware costs is likely to be a quick way to get there - and if the economy turns, Sun’s highly cyclical hardware arm could even provide a pleasant surprise.

One person familiar with Oracle’s thinking suggests that the company will act quickly to narrow the focus of Sun’s hardware on a smaller number of high-end system designs. And a person close to the Sun camp admits that Sun itself simply failed to act aggressively enough to cut costs - though this person adds that a big acquirer like a Oracle also has many more opportunities to save money than Sun could have done on its own, for instance by combining salesforces.

Another pragmatic reason to take on the hardware business is that it offers Oracle a strategic hedge. In a world dominated by a handful of giant systems companies, life as a pure software company could become uncomfortable: what if big partner/rivals like IBM and HP become less enthusiastic about selling and supporting Oracle’s software?

Being able to offer its own hardware gives Oracle a fall-back, according to one person close to the transaction. The very existence of an Oracle hardware division changes the equation and removes a potential weapon in the hands of its enemies.

Of course, none of this changes Oracle’s main motivation for the Sun acquisition: getting its hands on Java, Solaris and MySQL. But it does help to explain why a software company with operating profit margins of 35 per cent is willing to take on a business that recently has had trouble making any money at all.

Author: Richard Waters @ http://blogs.ft.com

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Oracle to buy Sun Microsystems for $7.4 billion

Sun Microsystems Inc.’s scramble to find a suitor landed the slumping server and software maker in the arms of Oracle Corp., which agreed to pay $7.4 billion in cash for Sun in a startling marriage that would transform Silicon Valley and the computing industry.

The acquisition announced Monday illustrates how some of the biggest and richest technology companies are racing to become one-stop shops for corporate and government customers.

By picking up Sun and expanding heavily into hardware, Oracle would look much more like the company it beat out for Sun — IBM Corp., which appears unlikely to re-enter the bidding.

Heavyweights like IBM, Hewlett-Packard Co., Cisco Systems Inc. and now Oracle all want to offer a richer mix of technology products. The companies hope to find more hooks into customers and use those relationships to sell other kinds of stuff.

That setup, with a broad mix of services, software and hardware, helped Armonk, N.Y.-based IBM escape financial ruin in the 1990s and become one of the industry’s most profitable companies. IBM has forked out nearly $13 billion on 40 acquisitions since 2006 to expand its offerings. HP has followed suit, spending $13.9 billion for services provider Electronic Data Systems last year.

Santa Clara, Calif.-based Sun lacked that kind of scale, especially after the tech meltdown of 2001 knocked the company off balance and led to a decade of financial pummeling.

Sun’s best sellers are computer servers and machines that store data on tape. But Oracle and IBM mainly had their eyes on Sun’s software.

The deal would give Oracle ownership of the Java programming language, which is a key element of the Internet and runs on more than 1 billion mobile devices worldwide. Oracle would get the Solaris operating system, which already has been a platform for Oracle’s products. And Oracle would get Sun’s MySQL database software, which has undercut Oracle and siphoned some sales away.

All these products are open-source, which means their underlying code is distributed freely on the Internet. To make money from the software, Sun sells support contracts alongside those programs. Like IBM before it, Oracle believes it can make money off those properties better than Sun can, partly by selling other products in package deals.

Forrester Research analyst Ray Wang thinks Oracle could keep MySQL to put pricing pressure on Microsoft, a longtime Oracle nemesis that sells a less-expensive database product.

“With the acquisition of Sun, Oracle is now able to make all of the pieces of the technology stack fit together and work well,” Oracle Chief Executive Larry Ellison said during a Monday conference call.

But unlike IBM, Oracle is a surprising suitor because it doesn’t make hardware. Although Sun wouldn’t be Oracle’s biggest acquisition during a four-year shopping spree that has cost about $40 billion, it may be the boldest.

Some analysts suspect Oracle might try to sell Sun’s hardware divisions if they turn out to be a drag.

“This is a really strange deal to me — Oracle buying all this hardware, I wonder what they’re going to do with it all,” said Jane Snorek, an analyst with First American Funds. “I don’t know what to think, frankly. It seems everyone wants to be IBM and have a mix. If it wasn’t the for the fact that Oracle is such a good acquirer, I’d be negative” about the deal.

Oracle shares sank 24 cents, 1.3 percent, to close at $18.82 in trading Monday. Sun shares jumped $2.46, 37 percent, to $9.15.

Oracle’s offer — which is valued at $5.6 billion when Sun’s cash and debt are taken into account — amounts to $9.50 per share. That represents a 42 percent premium to Sun’s closing stock price of $6.69 on Friday, and is about twice what Sun was trading for in March, before word leaked that IBM and Sun were in negotiations.

While Sun wouldn’t be Oracle’s most expensive acquisition, it will be the largest in terms of the people involved. Sun employs about 33,500 workers, far more than the roughly 12,000 that PeopleSoft had when Oracle bought that company in 2005 for $11.1 billion — the biggest outlay during Oracle’s expansion.

Sun has campuses in Broomfield and Colorado Springs.

Oracle, which already has roughly 86,000 workers, didn’t specify how many people will lose their jobs after it takes control of Sun. The cuts might not be as dramatic as they would have been in an IBM acquisition because Sun and Oracle have fewer overlapping products.

The smaller overlap also could keep Oracle from facing the antitrust objections that IBM likely would have prompted with Sun. Indeed, one of the sticking points in the IBM-Sun negotiations was the level of assurance Sun sought that IBM would see the deal through a regulatory review. Regulators figured to look closely at the way that swallowing Sun would expand IBM’s lead over Hewlett-Packard in certain markets for servers and data storage.

Oracle already says the Sun acquisition, which it expects to close this summer, will add at least 15 cents per share to its adjusted earnings in the first year after the deal closes. The company estimated Sun will contribute more than $1.5 billion to Oracle’s adjusted profit in the first year and more than $2 billion in the second year.

With former investment bankers Charles Phillips and Safra Catz steering things as the company’s co-presidents, Oracle has been able to hit its financial targets in all its acquisitions during the past four years.

That helped enable Oracle to earn $5.5 billion on revenue of $22.4 billion in its last fiscal year. Investors have enjoyed some of that prosperity too, with Oracle’s stock rising about 35 percent since the PeopleSoft takeover was completed in 2005. Oracle recently decided to pay a dividend for the first time.

But Oracle’s emphasis on increasing profits will likely raise concerns in its new role as the steward of Sun’s open-source software.

“This gives Oracle the keys to the crown jewels of the open-source movement,” said Wang, the Forrester analyst.

Ellison said Oracle intends to invest more heavily in Java than Sun has been able to afford as its fortunes waned. While Sun still has big sales — $13.9 billion last year — its profitability has been hit and miss. Earnings last year were $403 million, but from 2002 through 2006 Sun lost more than $5 billion.

Source: http://www.dailycamera.com

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