Dear Larry Ellison, CEO of Oracle (Nasdaq: ORCL):
Mr. Ellison, my hat is off to you: You are the founder of a company that is worth nearly $160 billion, get to sail in the America's Cup in your 60s, are married to a romance novelist (with Steve Jobs as your wedding photographer, no less), and are the third richest man in America.
But for all your personal and professional success, you have a growing problem. That problem is called Hewlett-Packard (NYSE: HPQ). HP shipped 17.5 times more servers last year than Sun (which you recently acquired), and is No. 1 to your No. 5.
And since when have you settled for being No. 5?
But I know how to solve your problem in a way that will also make your shareholders wealthy. And I'm going to tell you for free, because I'm that kind of chap.
You should acquire Dell (Nasdaq: DELL), even if it means paying double the current share price (or $27.10 per share) in a hostile takeover.
Flying too close to the Sun
Mr. Ellison, critics are starting to doubt the Sun acquisition because of plummeting market share in servers (now at 6.7%). The company that fired Mark Hurd, unfortunately, also managed to oust IBM (NYSE: IBM) as this year's sales leader. And the trend shows no sign of abating. In the third quarter, HP and IBM grew server revenues by 22.2% and 9% year over year, respectively, versus Sun's own anemic 0.9% growth.
But Dell is ripe for conquest: For a measly $25 billion-$52 billion (depending on the takeover premium) you can add an additional 14+% of market share in the server market. And a growing one to boot -- in the third quarter, Dell's server business grew revenues by 18.7%, twice as fast as No. 2 IBM and nearly identical to HP.
And of course with Dell you're not just getting servers: You're getting the PC market. And who better to help you understand this market than your newest hire, former HP CEO Mark Hurd? Do you have any doubt that Mark Hurd, who spruced-up HP, couldn't work some magic with Dell? And with a Dell acquisition, Oracle would triple its annual sales by simple math.
What you get when you buy Dell
But even if Hurd and you don't change anything about it, you're still getting a great deal when you buy Dell.
I should know; I'm a Dell shareholder.
Dell generated a whopping $3.5 billion in free cash flow in fiscal 2010. That's for a stock that costs $26 billion to buy.
So my little piece of the company is generating a nice 13.46% internal rate of return on its cash flow. And that's assuming no growth from fiscal 2010's results.
But wait, there's more. Dell has a $13.3 billion cash hoard. That's half the cost of the company! So let's assume for a second you were to buy the company, pay off all of Dell's debt, and then pocket any remaining cash. In that case, the business costs you not $26 billion, but $19 billion.
So now you have a business that generates $3.6 billion (after interest expense savings) but costs only $19.2 billion to acquire. That's an 18.75% IRR ... and again assuming no growth or cost savings from the merger.
You're gonna pay
Let's be honest, Mr. Ellison. I have something you want. As a Dell shareholder, I'm not going to let that 18.75% go without a fight ... or a sizable takeover premium. And since Michael Dell, who owns 12% of the company, is likely to vote down any takeover, the premium offered to shareholders better be big ... possibly even 100%.
A 100% takeover premium, or $27.10 per share, would take your annual return from 18.75% down to 8.15%. Assuming you and Hurd can grow Dell at a conservative 3%, that's still an 11.31% return even with an onerous takeover premium.
And with your strong balance sheet, the cost of financing the transaction will be far less than the 11.31% received, so Oracle shareholders go home happy.
And here's the kicker: The value mavens at Southeastern Asset Management are the single largest shareholder of Dell (at 7%) after Michael Dell. If you recall, Mr. Ellison, they were the single largest shareholder of Sun Microsystems when you bought Sun, too, and they were supportive of that deal.
So perhaps you should give them a call ... for old time's sake.
Sincerely,
Chris Baines
