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Page 5 of 7
Damage Control
On the day that Oracle announced the Sun acquisition, IBM, as might be expected, "sought to downplay" the deal, according to Steve Lohr of The New York Times. In a conference call with analysts, said Lohr, IBM's chief financial officer Mark Loughridge "gave no precise answer as to why I.B.M. did not complete the Sun deal, other than to say that I.B.M. has spent more than $20 billion on 100 acquisitions since 2000 and it has a 'very disciplined process' for assessing the potential risk and reward on deals. In the end, he suggested, a Sun deal did not pass muster."
Indeed, if IBM had decided that Sun was not a good investment, IBM had a funny way of showing it-by repeatedly bidding for Sun, up to the very end. Why would IBM keep offering to pay about $7 billion for a company it had decided did not pass muster? According to Sun's SEC filing, the IBM negotiations with Sun ended not because IBM decided the deal was not worth doing, but because IBM lowered its price to $9.10 and Sun's board found a better buyer in Oracle.
The Real Nitty Gritty
The SEC document filed by Sun on May 12, 2009, lifts the curtain and reveals a bevy of inside information. In a section entitled "Background of the Merger," Sun opens the kimono and reveals the hidden machinations that were occurring behind the scenes. The mysteries are illuminated as the document details the events and walks us through the intriguing twists and turns of the deal from Sun's vantage point.
First we learn that, in the first quarter of 2009, Sun explored opportunities with a number of companies and that three potential buyers ultimately emerged, identified as "Party A," "Party B," and Oracle. Party A is presumably IBM, and party B is most assuredly HP.
"Our management and advisors also approached or were approached by other parties during the first quarter of 2009, but except in the case of Party A, Party B and Oracle, no meaningful process for exploration of a possible transaction evolved from any of these discussions."
HP tells Sun that although it is interested in acquiring Sun, it is constrained by its circumstances and will not submit a bid.
"Party B indicated that it was interested in exploring a transaction, but that pursuing a transaction in the near term was not optimal for Party B at that time."
We learn that the IBM and Sun talks began on November 6, 2008, according to the filing, when Party A's CEO, presumably IBM CEO Sam Palmisano, called Jonathan Schwartz, Sun's CEO, to suggest "a possible business combination transaction."
We learn further that IBM entered into a confidentiality agreement with Sun and began conducting due diligence investigation of Sun's business on December 19, 2008, three months before news of the IBM-Sun talks was first leaked.
We also learn that IBM's initial offer was lower than its March 2009 offer of $10 per share that first came to light.
"On January 28, 2009, Party A delivered a preliminary proposal to us, proposing an acquisition of the company at a price of $8.40 to $8.70 per share in cash."
We learn that in mid-February that party B, presumably HP, changed its mind and also entered into a confidentiality agreement with Sun, and began conducting its own due diligence of Sun's business.
"On February 12, 2009, Mr. Schwartz, at the direction of and in consultation with the Committee, spoke with the Chief Executive Officer of Party B about a possible strategic transaction. Following this conversation, we and our representatives held several discussions with Party B and on February 18, 2009, we entered into a confidentiality agreement with Party B, at which point Party B commenced its due diligence investigations of the company. "
So we see that HP's interest in Sun apparently was deeper than had been realized.
We then learn that on February 20, 2009, IBM raised its offer to $10 per share in cash, and that the proposal "was conditioned upon our agreeing to exclusive negotiations with Party A and was accompanied by a draft exclusivity agreement."
This shows that after two months of due diligence investigations, IBM was keen on acquiring Sun and was moving aggressively to close the deal.
We learn that Oracle, through Scott McNealy reaching out to Larry Ellison, enters the scene about three days later. "On or about February 23, 2009, Scott McNealy the Chairman of our board, in consultation with the Committee, spoke with Larry Ellison, Chief Executive Officer of Oracle, concerning a possible strategic transaction with us."
However, talks with Oracle and HP and did not pan out at this time, so Sun ended them and entered into exclusive talks with IBM on February 26, 2009, about two weeks before the news was reported by The Wall Street Journal.
"On February 26, 2009, our board approved the exclusivity agreement with Party A, and we entered into the exclusivity agreement with Party A and terminated discussions with all other potential acquirors."
We learn that what Sun's board wanted most from IBM was "adequate certainty that a transaction, if agreed to, would be consummated," and that Sun and IBM held lengthy negotiations from February 26 to April 4, centered on IBM providing assurance to Sun that the deal would be consummated.
During the period that Sun and IBM were negotiating, we learn that Sun was contacted by Oracle and HP about resuming acquisition talks.
"During this time, our board met six times and the Committee met seven times to discuss with management and our advisors the status of negotiations with Party A, communications from Oracle, Party B and others seeking to discuss a potential transaction during this period and terminating the exclusivity arrangement with Party A, but the board and Committee determined to continue negotiations with Party A and not to terminate the exclusivity arrangement."
Apparently the news that Sun and IBM were negotiating seriously and exclusively made Oracle and HP nervous enough to move them to resume talks and attempt to force Sun to break its exclusive arrangement with IBM .
As noted previously, that there were two other serious suitors at the time Sun was negotiating with IBM was unknown to the media and was missing in its reporting. Ignorance of the existence and serious interest of Oracle and Party B caused the media to cast Sun as foolish for allowing the IBM talks to collapse, and as embarrassed and without any other prospects aside from IBM.
On March 12, Oracle made a bid for Sun's software assets. After considering the offer for four days, Sun's board rejected the deal and chose to continue its negotiations with IBM.
"On March 12, 2009, Oracle sent a letter to our board proposing the acquisition by Oracle of certain of our software assets, a minority equity investment by Oracle in our common stock and entering into certain strategic relationships. On March 16, 2009, our board met with management and our advisors to discuss Oracle's proposal and the board's fiduciary obligations. At the conclusion of the meeting, our board determined to continue negotiations with Party A and not to terminate the exclusivity arrangement with Party A to respond to Oracle's proposal."
Sun notes that on March 18, 2009, the day the previously hidden Sun-IBM negotiations burst into our public consciousness, "the media began reports that we were in discussions concerning a sale of the company with a potential acquiror."
We learn that IBM then reduced its offer from $10 per share to $9.40 per share and proposed new terms and conditions that Sun deemed impossible to satisfy. This is when the deal begins to fall apart.
" On March 29, 2009, Party A communicated that it was reducing the price it was offering for our common stock from $10.00 per share to $9.40 per share and proposed certain other terms and conditions under which it would be prepared to move forward with its proposed transaction. From March 30, 2009 to April 3, 2009, we and our advisors explained to Party A and its advisors in detail our concerns with Party A's proposal, including, in particular, with regard to transaction certainty and antitrust matters."
The final unraveling takes place when IBM gives Sun a "final offer" accompanied by an ultimatum to accept one of two terms or lose the deal. IBM tells Sun it can either accept $9.40 a share along with conditions that Sun had previously said it "considered impossible" to satisfy, or $9.10 per share without those conditions. Sun is told it must accept one of the two terms by 6 p.m. on April 4 or the deal would be over.
"On April 3, 2009, Party A indicated that it wished to bring the process to a close. On April 4, 2009, legal counsel for Party A delivered to us and our counsel two versions of a merger agreement, indicating that these agreements represented Party A's final offer to acquire us and that such offer would expire at 6 p.m. that day if one of the two agreements were not executed by us prior to that time. One of the draft agreements proposed a price per share for our common stock of $9.40 in cash and the other proposed a price of $9.10 per share in cash. Each of the agreements contained certain material terms related to transaction certainty to which we and our advisors had previously objected. The $9.40 agreement also required us to take certain actions as a condition to Party A's obligation to take certain steps to obtain antitrust clearance, which we had previously communicated to Party A that our management considered impossible for us to satisfy. The $9.10 agreement did not contain this condition."
On April 4, Sun's board considered the two IBM offers, found the terms unsatisfactory, and rejected them both. "Accordingly, our board rejected the Party A offers and terminated our exclusivity agreement with Party A."
A question arises here as to whether the perception that Sun had no alternative buyers caused IBM to overestimate its hand. Was delivering a take-it-or-leave-it ultimatum to Sun an act of brinksmanship on IBM's part-a gambit based on the assumption that it had Sun over a barrel-in an attempt to force Sun to accede to a lower price?
In any event, Sun refuses IBM's terms, and when the deal collapses, Sun brings Oracle and HP back into the picture. Sun's management and advisors, we are told, "recommenced discussions with Oracle and Party B with regard to a possible transaction. Party B recommenced its due diligence investigation of the company on April 9, 2009."
We also learn that IBM, despite issuing an ultimatum that its offer was final, approached Sun again to resume negotiations. "On April 8 and 9, 2009, our board met and discussed indications that Party A would be interested in meeting to discuss the parties' respective positions and explore re-engagement."
As noted above, this account of IBM asking Sun to resume talks is contrary to the CNBC account that was picked up and widely reported. The CNBC story portrayed Sun as going back to IBM with its tail between its legs to beg for negotiations to resume. In that version, IBM firmly refused to deal with Sun, proclaiming that the termination of their talks was final.
And as we recall, in CNBC reporter Jim Goldman's version of the story, IBM is portrayed as wanting to avoid a prolonged and painful government regulator probe that a source likens to a financial proctology exam. Also recall that Goldman reports that, "I'm told from one source that Sun is available now virtually at any price, but that IBM may not be interested in Sun at any price."
But we find in Sun's account that IBM continues to be interested in acquiring Sun. As the SEC filing relates, Sun agrees to meet with IBM, and "on April 10, 2009, our representatives met in person with representatives of Party A and reviewed the parties' respective positions."
Interestingly, we learn that on the same day that Sun is meeting with IBM, that it is also hedging its position by entering into a confidentiality agreement with Oracle.
"On April 10, 2009, we and Oracle entered into a confidentiality agreement and Oracle commenced its detailed due diligence review of the company. On April 11, 2009, management of Oracle met with Mr. Schwartz and members of our senior management to discuss the company and a possible transaction."
We learn that IBM's final offer turns out not to be final. On April 16, 2009, Sun and IBM resume negotiations and IBM issues yet another ultimatum.
"On April 16, 2009, we and Party A agreed to reengage in negotiations but Party A communicated that if Party A and we were not able to reach agreement and announce a transaction by the morning of April 20, 2009, that Party A would terminate discussions."
But Sun finds IBM unwilling to change its basic terms. Again, this begs the question of what IBM knew, and whether it would have altered its stance if it had been aware of other suitors.
"With respect to price, Party A continued to indicate that it was prepared to pay $9.10 per share for certain agreement terms and conditions and was prepared to pay $9.40 per share for certain other agreement terms and conditions."
Believing that this was the best deal IBM was going to offer, Sun engaged Oracle and HP in discussions and asked them to tender an offer by end of day of April 17.
"On April 16, 2009, our board met with our legal and financial advisors and discussed recent discussions with Party A, Party B and Oracle. Later that day, Credit Suisse advised Oracle and Party B, at our request, that if they were interested in acquiring the company, they should submit, no later than the end of the day on April 17, 2009, an offer in the form of a draft agreement that they were prepared to execute. Also on April 16, representatives of our management met with management of Party B to discuss a possible transaction with us."
HP informs Sun that it will not make an offer.
"On April 17, 2009, Party B informed us that it would not be submitting a proposal for a strategic transaction with us."
But Oracle informs Sun it will make an offer.
"Also on April 17, 2009, Oracle indicated to us it would be making a proposal."
That evening, Oracle's offer arrives. It is 10 cents per share higher than IBM's best offer. Sun's board likes Oracle's bid, and begins hammering out the terms of a deal with Oracle.
"Latham & Watkins delivered a draft merger agreement, including a proposed price per share of $9.50, and Oracle, we and our respective advisors commenced negotiations of the merger agreement."
A question arises here as to whether the members of Sun's board who were dealing with Oracle informed Oracle of the amount of IBM's bid and asked Oracle to beat it.
On April 18, 2009, Sun's board compares the price and conditions associated with IBM's and Oracle's offers and decides that Oracle's bid is the best deal. Sun's board decides to make one last attempt to induce Oracle to raise its price.
Thus, we learn that:
"Mr. Schwartz called Safra Catz, President of Oracle, and proposed a higher price per share, other than $9.50, which Ms. Catz stated would not be acceptable to Oracle."
The Sun board then considers the $9.50 per share proposal and unanimously agrees to go with Oracle.
"After deliberations and consideration, the members of our board present at the meeting unanimously determined that the Oracle merger agreement, the merger contemplated thereby and the other transactions contemplated by the merger agreement were advisable and in the best interest of our stockholders and approved the Oracle merger agreement..."
We learn, however, that Sun gives IBM one last chance to formally propose its best terms, in the event the Oracle deal falls through.
"Our board also instructed management and counsel to finalize price and contract negotiations with Party A, in case Oracle was not able or willing to execute a definitive merger agreement in accordance with the terms approved by our board."
IBM tells Sun that $9.10 per share is its best offer. IBM also issues a third ultimatum to Sun to accept its terms 5 p.m. that day or the offer would terminate.
"On April 19, 2009, a member of our board requested that Party A confirm the price it would be willing to pay for our common stock. Party A replied that it was prepared to pay $9.10 per share and did not have any further flexibility on price. Later that day, counsel for Party A delivered to Wilson Sonsini a merger agreement proposing an acquisition of our common stock at a price of $9.10 per share. Subsequently, Party A indicated that all offers from Party A with regard to an acquisition of the company would be withdrawn at 5:00 p.m. if we did not execute a definitive agreement with Party A prior to that time."
With IBM offering less, Sun's path seemed clear.
"On the afternoon of April 19, 2009, we and Oracle executed the Oracle merger agreement."
Sun then informed IBM the game was over.
"Following execution of the Oracle merger agreement, a member of our board informed a representative of Party A that we were terminating further discussions with Party A."
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