Download - ORCL HPQ Presentation Final

8/3/2019 ORCL HPQ Presentation Final

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Seduces Hewlett Packard


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THE TECHNOLOGY COHewlettPackard


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3

Background

Motivation

Premerger Analysis

Financial Statements & Multiples

Five Factor DuPont

EVA Analysis

Merger

HP under Oracle Management

Oracle pre and post merger valuation

Financial Planning

Conclusion

Agenda

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Background

Oracle (ORCL)Bidder HP (HPQ)

American multinational computertechnology corporation , founded onJune 16, 1977 by Larry Ellison and BobMiner.

Computer database

Computer software Computer middleware Computer systems Computer hardware

Revenues (2011): $36.49 Billion Market Cap. (2011): $160.42 Billion

Employees (2011): 108,429 Stock Price: $31.81 Direct Competitors:

IBM Microsoft Corporation (MSFT) SAP AG.

Hewlett-Packard CoAmerican multinatiotechnology corporatby Bill Hewlett and D

Computer hard

Computer softw IT consulting IT services

Revenues (2011): $ Market Cap. (2011) Employees (2011): 3

Stock Price: $26.6 Direct Competitors: Accenture plc.

(ACN) Dell IBM

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Motivation

Oracles Headquarters is in Palo Alto, CA, and HPs HeSanta Clara, CA. (15 miles away)

On August 17th, 2011, HP is planning to buy AutonomyUKs biggest business software company Autonomy fo

(25.50 per share a 64%).

HPs new strategy to focus on

software and services, and to

consider a spin-off of its PC

division.

The acquisition will make a better challenge to IBM.

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Oracle (ORCL)Bidder HP (HPQ)T

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Merger Details

Financials

Multiples

Five Factor DuPont EVA Quadrants

PremergerAnalysis

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Merger Details

Politics Behind the Deal

Crowning achievement for Larry Ellison

Mark Hurd former CEO of HP now deputy CEO of Ora Ray Lane former #2 at Oracle now Chairman of HP

Deal seen as target practice for Oracle to go after IBM

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Merger Details

HPs Collapse

HPs strategic shift into enterprise software

Stock prices dropped 20% since the strategy shift

HPs venture into mobile ecosystem

Resulted in hundreds of workers being laid off

Over the last two years, HP paid $81 million in investm

related to acquisitions and its market value has fallen during the same time period

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PremergerAnalysis

Financial Statements

(in millions of dollars)

ORCL

Sales $ 35,622.00 $ 126

Operating Expenses 15,191.00 114,

EBIT 20,431.00 11

Interest of debt 808.00

Earnings before taxes 19,623.00 10

Income taxes 2,864.00 2

Net Income $ 16,759.00 $ 8

Common shares outstanding 5,068.00 2

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PremergerAnalysis

Multiples -Introduction to DCF Analysis

ORCL HPQ

EV/

Rev 3.92 0.62

EV/EBITDA 9.39 4.80

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PremergerAnalysis

Five Factor DuPont

Return On EquityOracle HP IBM

Tax burden [NI/PBT= (1-t)] (27.50) 0.78 0.

Interest burden* [PBT/EBIT] (0.03) 0.90 1.

OPM [EBIT/Sales] 0.44 0.09 0.

Asset turnover 0.52 1.10 1.

Equity Multiplier 1.73 2.42 2.

ROE: 5-factor Dupont 0.29 0.18 0.

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PremergerAnalysis

IBM

DELL

ORCL

HPQ

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

-2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00

Growth in Net Cap X/Share

EVAQuadrantAnalysis

Q1: Stagnant Companies Q2: Growth Creates V

Q3: Positive Restructure Q4: Growth DestroyHewlettPackard


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Merger Proposal Details

Most likely estimates for HP's operations under Oracle control

Years

1-5 6-7

Sales growth rate (g) 0.05 0

EBIT as a percentage of sales (p) 0.07 0

Income tax rate (T) 0.35 0

Capital investment per dollar of sales increase (f) 0.03 0

Working capital per dollar of sales increase (w) 0.06 0

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Assumptions

HPQ run by ORCL sales growth and EBIT/sales

Sales Growth EBIT/sales

Years

Years

Scenario 1-5 6-7 8-10 1-5 6-7

1. Conservative 0.04 0.02 0.02 0.05

2. Most likely 0.05 0.04 0.03 0.06

3. Optimistic 0.06 0.05 0.04 0.07

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HP Under Oracles Control

Years

$ 1 $ 2 $ 3 $ 4 $ 5 $ 6 $ 7

Sales $132,335 $138,951 $145,899 $153,194 $160,854 $167,288 $173,979

Operating expenses $123,071 $129,225 $135,686 $142,470 $149,594 $157,250 $163,540

EBIT $ 9,263 $ 9,727 $ 10,213 $ 10,724 $ 11,260 $ 10,037 $ 10,439

Income taxes on EBIT $ 3,242 $ 3,404 $ 3,575 $ 3,753 $ 3,941 $ 3,513 $ 3,654

Operating earnings after taxes (NOPAT) $ 6,164 $ 6,465 $ 6,781 $ 7,113 $ 7,461 $ 6,524 $ 6,785

Depreciation $ 4,230 $ 4,441 $ 4,663 $ 4,897 $ 5,141 $ 5,347 $ 5,561

Less capital expenditures $ (4,322) $ (4,538) $ (4,765) $ (5,004) $ (5,254) $ (5,464) $ (5,683

Less increase in working capital $ 149 $ (4,385) $ (451) $ (473) $ (497) $ (418) $ (434)

Cash Flow (FCF) $ 6,221 $ 1,983 $ 6,228 $ 6,532 $ 6,852 $ 5,990 $ 6,229

Tax Rate 35% WACC 8.1%

Capital Inv/Sales 3% Work Cap/Sales 6%

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HP Under Oracle Control

Maximum acceptable cash price for HPQ - most likely scenario

(with a discount rate of 0.081 in millions of dollars)

0.081

Year Cash Flow Present Value

1 $ 6,220.53 $ 5,768.45 $

2 $ 1,982.52 $ 1,704.83 $

3 $ 6,228.10 $ 4,966.48 $

4 $ 6,532.37 $ 4,830.54 $

5 $ 6,851.87 $ 4,698.56 $ 6 $ 5,989.75 $ 3,808.87 $

7 $ 6,229.34 $ 3,673.33 $

8 $ 6,501.64 $ 3,555.27 $

9 $ 6,729.20 $ 3,412.28 $

10 $ 6,964.72 $ 3,275.04 $

Residual Value $ 7,522.86 $ 121,867.98 $Plus temp investments not required for current operatons $

Less Debt Assumed $

Maximum acceptable cash price $

Maximum acceptable cash price per share $

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Scenario Analysis

Maximum acceptable cash price for three scenarios and a range of discount rates

Discount Rates

Scenarios 0.06 0.07 0.08 0.09

1. Conservative

Total Price ($ millions) $ 157,213 $ 124,330 $ 100,398 $ 87,7

Per Share Price $ 66.22 $ 52.37 $ 42.29 $ 36.

2. Most Likely


Per Share Price $ 93.71 $ 74.41 $ 60.40 $ 52.

3. Optimistic


Per Share Price $ 118.95 $ 94.67 $ 77.05 $ 67.

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Scenario Analysis

Rate of Return for various offering prices and scenarios

Offering price

otal ($millions) $ 88,408 $ 91,565 $ 94,723

Scenarios Per Share $ 37.24 $ 38.57 $ 39.90

1. Conservative 0.091 0.088 0.0

2. Most likely 0.129 0.123 0.1

3. Optimistic 0.173 0.167 0.1

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Projected ten-year cash flow statement for ORCL (in millions of

dollars)

Years

1 2 3 4 5 6 7

Sales $ 37,047 $ 38,529 $ 40,070 $ 41,673 $ 43,340 $ 44,856 $ 46,426 $

Operating expenses $ 26,674 $ 27,741 $ 28,850 $ 30,004 $ 31,205 $ 32,745 $ 33,891 $

EBIT $ 10,373 $ 10,788 $ 11,220 $ 11,668 $ 12,135 $ 12,111 $ 12,535 $

Income taxes on EBIT $ 3,631 $ 3,776 $ 3,927 $ 4,084 $ 4,247 $ 4,239 $ 4,387 $

Operating earnings after taxes

(NOPAT) $ 6,743 $ 7,012 $ 7,293 $ 7,584 $ 7,888 $ 7,872 $ 8,148 $

Cash Flow (Net Approach) $ 6,080 $ 6,323 $ 6,576 $ 6,839 $ 7,113 $ 7,167 $ 7,418 $

Oracle Pre and Post MergerValuation

Tax Rate 35% WACC 7.84%

Capital Inv/Sales 2% Work Cap/Sales 45%

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ewlettPackard


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Oracle Pre and Post MergerValuation

Estimated present value of ORCL - most likely scenario

(with a discount rate of 0.078 in millions of dollars)

0.0784Year Cash Flow Present Value

1 $ 6,080.20 $ 5,638.31

2 $ 6,323.41 $ 5,437.68

3 $ 6,576.34 $ 5,244.19

4 $ 6,839.40 $ 5,057.58

5 $ 7,112.97 $ 4,877.61

6 $ 7,167.21 $ 4,557.62

7 $ 7,418.07 $ 4,374.31

8 $ 7,589.45 $ 4,150.11

9 $ 7,817.13 $ 3,963.95

10 $ 8,051.65 $ 3,786.14

Residual Value $ 8,738.49 $ 157,659.74

Plus temp investments not required for current operations

Less Debt Outstanding

Maximum cash price

Maximum cash price per share

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ewlettPackard


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Cash and Stock Deal

Oracle will have to realign historic Debt/Equity ratio

From 45% to 38.5%

Oracle has $38.376M in cash

Remaining $50,031M will be financed by stock

Oracles estimated value is $42.61 per share

Currently undervalued at Market Price of $31.81 pshare

Oracle should exchange 1,572 shares selling at $31.8

Financing Plan

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Net Effect ofStock Finance

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ewlettPackard

Oracle currently has 5.068 billion shares

Once the merger occurs:

Current Oracle shareholders will own 76.3% of thcompany

Current HP shareholders will own 23.7% of the necompany

Net effect of stock financing is a $18,976M gain forshareholders


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Conclusion

Combined Cash & Stock Deal

Value Created (Goal Line)

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Hewlett Packard

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