Sun Microsystems Case Study

Sun Microsystems Case Study


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4. Conduct compare companies or multiples analysis to value Sun. What economic fundamentals are reflected in the multiples?

Consistency is very vital for the multiples that are used in the valuation and the earnings of the company since they have to obtain the best price. For instance, the use of price to earnings multiple which is (price per share/earnings per share) can be effective during the calculation process. The method works by considering both the equity and income in which the equity is compared against the income. However, in order to avoid being misled when there is the use of revenue because revenue provides presumptions made by the company, therefore, the company is evaluated by the use of its cash flow. As such, several multiples that assimilate the use of a capital structure of the company have been employed. This is because through such techniques the results obtained are just similar to those obtained by the acquirer. These are such as cash on hand, EBITDA multiples and EBIT multiples of the company in question.

Multiples Used in Comparable Companies

This multiple works on the assumption of homogeneity of the products being offered by the companies in comparison, the goods, and services in these companies must have similar rates (Petit & Ferris, 2013). Besides that, another important proportion that has to be similar is the earnings across these companies. As a result, the comparison can easily be done by taking into consideration the figures of other firms in form of index which compares in terms of size, earnings, and products that fall under a similar industry.

Sun being a fir that deals with hardware, storage, and software like the Java, MySQL and Solaris, business utilities and systems. There is a need for comparison of other companies in this line in order to have a successful comparison analysis. The exhibit 4 shows a snapshot of the companies that sell both tangible and intangible goods. Therefore, the companies that have to be compared with Sun have been taken in consideration that Sun is an advanced hardware firm which has later meant sieving of the initial list of firms to only those firms and companies that the products and services they offer are similar to those at Sun Microsystem. These are such as Apple, Dell, Hewlett-Packard (HP), International Business Machines (IBM) and Intel.

The keen comparison revealed that comparable companies` that have levered betas reflect a median of 1.12 in their entire industry, while there was a levered beta of 1.73 for Sun as shown in exhibit 9. In addition, there was unlevered beta by computation of the debt to equity (D/E) ratio. In this case, a 35% taxation rate (question 2), with an exhibition median of 9.35% had unlevered beta of 1.58% throughout the entire industry. However, in this case, Sun had a debt to equity ratio of 25.44% with a levered beta of 2.13 which makes it higher than the current market.

This comparison thus shows that the business is performing better than the line of industry its operating under. As such, the Sun has an ideal debt ratio of debt to equity which it has achieved. Besides that, we also determined the cost of equity by the used capital asset pricing model (CAPM). In which we had to substitute a risk-free rate of 2.82% and an additional market premium of 6% (Assumed in question 2). Then we computed a debt to capital ratio, equity to capital so that we could attain a comparable company` weights of both equity and the debt, this was achieved by the use of information obtained in the exhibit 9. We then had to reassert the optimum capital structure that has to be obtained by Sun in order to correspond to the median in the market. The bond rating of each company is mentioned in the exhibit 9, as such, the cost of debt was taken from corporate bond yields that’s is provided in the exhibit 10 (in confirmation with the bind ratings of other firms).

Finally, we had to calculate WACC in which we obtained a value of 9.50% which was the industry`s median and 12.05% for the Sun Microsystems. This is very clear that Sun Microsystem has a much higher cost of capital than that in the industry. This is shown in the elevated rates of return which are to be received in the capitalization of Sun Microsystems. This was finally followed by the computation of multiples using the EBITDA, EBIT, and sales provided in exhibit 9.




Multiples Analysis


EBIT Multiple EBITDA Multiple Sales Multiple
Sun Microsystems -1.41 -13.15 1.72
Median 9.40 6.28 1.39


Because of the importance of the average values in the computation of Sun Microsystem`s we integrated them and implied an enterprise value (EV).

Therefore, for us to conduct a successful comparable companies’ analysis (CCA), we had to determine the average price per share. In this case, we discovered that the first to be determined is the average EBIT, EBITDA and the sales average values obtained in the previous years (2007-2008) so that we could form the information obtained on the documented historical data. We were only successful to get data for the previous two years which we included both years. The excel sheet Q4 has an inclusion of the detailed computations for our calculations done when obtaining the average price per share, which gave an outcome of $13.06 as the final average share price.

Economic Fundamentals

In order to determine the terminal value, we had to take the U.S treasury`s earnings for a period of ten years and assumed it to be the risk-free rate and later on substituted as the growth rate. Therefore, to determine the average price per share required for CCA, we had to compute the implied enterprise value (EV) by the use of the averages of multiplied that had been mentioned earlier on.  However, because we know that that this CCA will be used as a benchmark for Sun Microsystems in evaluation we must be aware that the benchmark might give results which are inaccurate of the real value of the company. This is may be due to the fact that some firms are more considerable on fiscally sound and firm stances in comparison to Sun Microsystems, these are such as Dell and Apple.