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SEC Reveals Details Of Bidding War For Sun

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An SEC affidavit filed by Sun Microsystems reveals the back story of how IBM, Hewlett-Packard and ultimate victor Oracle submitted competing bids as Sun dealt with the inevitability of a takeover

In an SEC proxy filing on 12 May outlining the background behind Oracle’s acquisition of Sun Microsystems, Sun explained some of the logic behind the proposed deal, which was unanimously approved by the Sun board but also has elicited ire—and three class action lawsuits—from some angry shareholders.

Fundamentally, Sun, which has lost billions of dollars over the last decade since the high-end workstation and server market went south in 2000 and 2001, believed its only realistic chance of surviving the next few years would be to be acquired by a company with products complementary to its own.

According to the SEC document, Sun talked to three potential buyers. Only Oracle, however, was named. Industry sources have told eWEEK off the record that the two other companies were IBM and Hewlett-Packard.

According to eWEEK sources at the time, and verified by the report in the SEC document, IBM was prepared to make the deal and had even gone as far as getting the cash transfer ready. However, Sun’s engagement with IBM focused “on the need to address issues of transaction certainty,” the document said.

Due to a number of legal and regulatory uncertainties, IBM was not willing to guarantee the completion of the transaction in the case of federal antitrust litigation. The combination of IBM and Sun products would have given IBM a large share of the high-end data center market and the deal would have been subject to possible antitrust investigation.

What follows is a timeline review of the events and decisions that resulted in the 20 April announcement that Sun would end its 27-year tenure as an independent IT hardware, software and services provider and be acquired by Oracle, one of the world’s largest enterprise software providers.

Nov. 6, 2008: The CEO of “Party A,” Sam Palmisano of IBM, approaches Sun President and CEO Jonathan Schwartz and suggests a possible business combination transaction. The words “acquisition” and “merger” were not used in this part of the document.

Dec. 19, 2008: Sun and IBM enter into a confidentiality agreement, after which IBM begins its due-diligence investigation of the company.

Jan. 28, 2009: IBM delivers a preliminary proposal to Sun, proposing to acquire the company at a price of $8.40 per share to $8.70 per share in cash. This represents about an 80 percent premium on the current selling price of Sun stock.

Jan. 29: Sun hires Credit Suisse to be its financial adviser for a possible acquisition or merger with IBM.

Feb. 12: Schwartz, at the direction of the Sun board, speaks with the CEO of “Party B”—which eWEEK is told was HP—about a possible strategic transaction.

Feb. 18: Sun enters into a confidentiality agreement with HP, at which point HP begins its own due diligence investigation.

Feb. 20: IBM delivers a revised proposal to the Sun board, proposing an acquisition of the company at a price per share of $10 in cash.

Feb. 23: Sun Chairman Scott McNealy meets with Larry Ellison, CEO of Oracle, concerning a possible strategic transaction.

Feb. 22 to Feb. 26: The Sun board holds three special meetings to discuss with management and advisers the revised IBM proposal and the status of discussions with Hewlett-Packard and Oracle. Sun management and advisers ask Hewlett-Packard to make a proposal for a transaction, but Hewlett-Packard does not do so. McNealy holds further discussions with Ellison.

Feb. 26 to April 4: Sun and advisers hold lengthy negotiations with IBM and its legal counsel, including negotiation of a draft definitive agreement for the transaction proposed by IBM. Sun’s engagement with IBM focuses on the need to address issues of transaction certainty.

“In particular, we focused on optimizing the likelihood that a transaction with IBM would receive approval from antitrust authorities, mitigating risks to our business if a transaction with IBM did not get antitrust approval and requiring IBM to close the transaction, if approved by antitrust authorities,” the document reads.

During this time period, Sun’s board meets six times “to discuss with management and advisers the status of negotiations with IBM, communications from Oracle, Hewlett-Packard and others seeking to discuss a potential transaction during this period and terminating the exclusivity arrangement with IBM, but the board and committee determined to continue negotiations with IBM and not to terminate the exclusivity arrangement,” according to the document.

March 12: Oracle sends a letter to the Sun board proposing the acquisition of Sun’s software assets, a minority equity investment by Oracle in common stock and entering into certain strategic relationships.

March 16: The Sun board meets with management and advisers to discuss Oracle’s proposal and the board’s fiduciary obligations. The board decides to continue negotiations with IBM and not to terminate the exclusivity arrangement with IBM to respond to Oracle’s proposal.

March 18: The media reports that Sun is in discussions concerning a potential acquisition of the company. eWEEK discusses IBM as the likely buyer.

March 29: IBM communicates that it is reducing its offer for common stock from $10 per share to $9.40 per share and proposes other terms and conditions under which it would be prepared to move forward with the proposed transaction.

March 30 to April 3: Sun and advisers explain to IBM and its advisers in detail their concerns with the proposal, particularly in regard to transaction certainty and antitrust matters.

April 3: IBM indicates that it wants to bring the process to a close.

April 4: IBM lawyers deliver to Sun two versions of a merger agreement, saying these documents represent IBM’s final offer to acquire Sun and that the offer will expire at 6 p.m. that day. One of the agreements proposes a price per share for Sun common stock of $9.40 in cash and the other proposes a price of $9.10 per share in cash. Each offer has other considerations attached.

The Sun board meets to discuss the IBM offers. The board concludes that the risks of a transaction with IBM on the terms then being proposed are not in the best interests of Sun’s stockholders relative to other alternatives available. The board then rejects the IBM offers and terminates its exclusivity agreement with IBM.

April 6: The Sun board meets to discuss Oracle and HP inquiries. Management and advisers recommence discussions with Oracle and HP with regard to a possible transaction. HP resumes its due diligence investigation of Sun on April 9.

April 10: The Sun board decides to contact IBM one more time to explore the possibility of further negotiations. Later that day, Sun and Oracle enter into a confidentiality agreement and Oracle commences its detailed due diligence review of the company.

April 11: Oracle management meets with Schwartz and other Sun managers to discuss a possible transaction.

April 16: Sun and IBM agree to new negotiations, but IBM insists that if it and Sun are not able to reach agreement and announce a transaction by the morning of April 20, IBM will terminate discussions. The two compensation options—for $9.10 per share and $9.40 per share—are still on the table.

April 17: HP informs Sun that it will not be submitting a proposal for an acquisition. Later that day, Oracle indicates that it will be making a proposal at a price per share of $9.50.

April 18: The Sun board discusses terms proposed by Oracle as well as the terms then being proposed by IBM and the status of negotiations with IBM. At this time, IBM has not definitively confirmed the price it was proposing, but it has not indicated any flexibility to negotiate above $9.40 per share since lowering its proposed price on March 29.

April 19: A Sun board member requests that IBM confirm the price it would be willing to pay for Sun’s common stock. IBM replies that it is now prepared to pay only $9.10 per share and does not have any further flexibility on price. Later that day, Sun and Oracle sign the Oracle merger agreement for $9.50 per share.

April 20: The media is alerted about the agreement.