What economic fundamentals are reflected in the multiples? When conducting DCF with perpetuity the risk free rate is used as the growth rate to calculate TV of Sun microsystems. When conducting DCF with multiples we use the median of the debt to equity ratio of comparable companies to come up with the EBIT exit multiple to calculate the TV of sun Microsystems. Based on the information above one might think that using the multiples approach may be the correct way to value Sun Microsystems. However using multiples in this situation may be inaccurate to calculate TV for Sun Microsystems, because the companies being used to compare to Sun Microsystems are in a lot better off financially than Sun Microsystems such as Intel; thus overvaluing Sun Microsystems.
If a competing bidder appears, how high a price should Oracle be willing to offer? Based on the calculations made by forecasting the value of Sun Microsystems post absorption by oracle it was noticed that the price offered by Oracle to Sun Microsystems left a lot of room for negotiations assuming additional bidders appear. For both the DCF with Perpetuity TV and Multiples TV predict/portray a value surpassing the $9.50 offer. However the question on how high should Oracle be willing to offer will depend on Oracles management’s desire of return is. Theoretically the price offered by Oracle should remain from $9.50 PS to $14.45 PS. See Excel Spread Sheet attached for calculations.
