Oracle Getting Burned by Sun Deal?

Oracle Corp. (ORCL) has agreed to buy Sun Microsystems, Inc. (JAVA) for $7.4 billion ($9.50 a share) after IBM Corp. (IBM) backed out of its deal. Oracle is a software company (successful software companies become "banks" because they generate so much cash) and so the antitrust problem that existed for IBM is not a factor in the Oracle transaction.

This is a departure for Oracle and, in my opinion, is an expensive foray into uncharted territory. There is no reason to think that a software company can run a hardware and service business. So Sun is likely to retain the unsuccessful management that has failed to turn Sun back into a profitable company.

The purchase price is too much; Sun having been shopped to all and sundry. This is a major coup for the investment bankers who have maximized a fee from a deal that few, if any, companies would buy at that price.

In our opinion, Oracle would have to sell the hardware and service part of Sun to get back some of the purchase price, pay down the debt (Sun is in a net debt position after allowing for its cash) and be prepared to swallow losses over the next few years.

On the 2008 balance sheet Sun has $3,000 million in cash, $458 million and $1,263 million in debt.

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