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The Invisible Hand
While Sun's disclosures give us a detailed account of the events, the narrative is not complete. It turns out that there is one more layer of hidden activity to uncover, which is revealed in a Reuters report re-released on April 20, 2009-the day the Sun-Oracle merger was announced. This report informs us of the "invisible hand" that was working behind the scenes to drive Sun to Oracle.
The invisible hand, it turns out, belonged to Sun's largest shareholder, a company named Southeastern Asset Management, based in Memphis, Tennessee, whose chairman and CEO is O. Mason Hawkins.
Southeastern Asset Management's December 8, 2008, SEC filing shows it owned a total of 159,924,103 shares of Sun, for which it paid approximately $2,089,349,255 in the aggregate. This made Southeastern a 21.5% owner of Sun.
The invisible hand had seen the writing on the wall. Watching Sun's steady decline and believing that Sun's prospects for turning itself around were not very good, Southeastern was looking to cut its losses and cash out. Even at the $9.50 per share price Oracle has agreed to pay for Sun, Southeastern would lose about $500 million on its investment. Southeastern was a motivated seller and ready to make things happen. In its October 22, 2008, SEC filing, Southeastern inserted a clause informing that :
"In this situation, Southeastern has talked to the Issuer's management, and will have additional conversations with management and/or third parties, regarding opportunities to maximize the value of the company for all shareholders."
Southeastern was setting the legal groundwork to bypass Sun's board, if necessary, and speak directly to third parties about acquiring Sun.
In Reuters' report, we learn that "Southeastern keeps a low profile and prefers to iron out issues with management through private conversations rather than a media blitzkrieg."
To gain more leverage, Southeastern persuaded Sun to appoint one of Southeastern's members, "former Fannie Mae Chief Information Officer and technology veteran Rahul Merchant," to Sun's 12-member board of directors in January 2009, according to Reuters.
At the same time, says Reuters, Southeastern teamed up with Kohlberg, Kravis, Roberts & Co. another major Sun shareholder whose affiliate KKR Private Equity Investors, "made a $700 million investment in Sun in 2007 in the form of convertible notes."
We also learn from Reuters' sources that KKR and Southeastern had "been in contact about a strategy for Sun" and that Sun's board members "spent hours on the phone with each other...trying to figure out what everyone had in mind for the future of the company."
Southeastern's politics and pressure apparently succeeded. According to the Reuters sources, Sun's board decided that "Sun needed to explore strategic alternatives that would bring maximum value for the company's strong core assets, whether through a restructuring or a sale."
Sun then hired investment bank Credit Suisse to run the process, the sources said. The Credit Suisse team, which was led by "star technology banker George Boutros," sent out feelers to almost every potential buyer in the industry, including HP, Dell, Cisco, and IBM, one of the Reuters sources said.
We learn that Sun's board split into two separate teams that carried on simultaneous negotiations with Oracle and IBM. "Some members of Sun's board began pursuing talks with Oracle executives after the three-and-a-half-week exclusive negotiations with IBM broke down, while others kept a discussion with IBM open," one source said.
When it became clear that IBM would not budge from the terms that Sun's board found unsatisfactory, "Sun and Oracle began formal negotiations after Sun called Oracle and said IBM was 'not doable,' " a Reuters source said.
When Oracle learned that the Sun-IBM deal was at a dead end, it moved swiftly to secure Sun, according to the sources. "With IBM out of the picture, Oracle realized it could get its hands on Sun's prized software assets for a per share price in the mid-nine-dollar level, and wouldn't have to bid against another company," a Reuters source said.
"They were lightning fast," another source said of Oracle.
According to a Reuters source described as "close to the talks," IBM was caught off guard by the Oracle-Sun deal, with the source saying that "IBM was surprised last night."
Sadness at Sunset
One thing that struck me as I researched this story was the sadness expressed over Sun's demise on sites across the Internet. Wrote one commentator: "Yes, I will miss Sun...It's sad...that another iconic Silicon Valley company is going to disappear." Wrote another: "It's really sad when big and significant corporations such as Sun Microsystems go this path. I guess all good things come to an end. Imagine all the innovations Sun brought us: Java, SPARC, Sun OS/Solaris to name a few..."
Looking back at Sun's history, its merger with Oracle, and what the future might hold, a commentator wrote: "We live in interesting times. The tech industry has always lived in interesting times."
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