What's Really Going On in Oracle, Sun Deal?
Some investors have been complaining, and filing suit, over the proposed Oracle acquisition of Sun, claiming that the latter is going too cheaply. Now, as the SEC filings are appearing, Sun's position is something like the person of easy virtue, who started saying "Oh, I'd never," and then ended up with, "Oh, I think I did." And what is turning up in the filings is suggesting why investors might not be getting the money they'd like for the company.
One wrinkle is Sun's filing that it may have violated the Foreign Corrupt Practices Act of 1977, or FCPA. As the Department of Justice explains:
In general, the FCPA prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business. In addition, other statutes such as the mail and wire fraud statutes, 18 U.S.C. § 1341, 1343, and the Travel Act, 18 U.S.C. § 1952, which provides for federal prosecution of violations of state commercial bribery statutes, may also apply to such conduct.This is serious stuff, and companies have faced fines and executives, jail time over violations. Now, as I mentioned on Monday, the FCPA is complex and violations by business partners, subsidiaries, distributors, or agents can implicate a company without its knowing. It is hardly unusual for companies to discover a potential FCPA violation during something like a due diligence examination.
Now we bring in an observation of James Tillen, a member of law firm Miller & Chevalier, who looked through the Oracle-Sun M&A agreement that was filed with the SEC, mentioned to me. Sun filed the document on April 20. In it, Sun said that it had complied with the FCPA and hadn't made improper payments to government officials. But there was also a caveat that any representations and warranties "could have been modified or qualified in a separate confidential document between Sun and Oracle, called a disclosure schedule," says Tillen.
On May 8, Sun filed a 10-Q, which, in part, noted that the company may have been in violation of the FCPA and had notified the Department of Justice:
During fiscal year 2009, we identified activities in a certain foreign country that may have violated the Foreign Corrupt Practices Act (FCPA). We initiated an independent investigation with the assistance of outside counsel and took remedial action. We recently made a voluntary disclosure with respect to this and other matters to the Department of Justice (DOJ), Securities and Exchange Commission (SEC) and the applicable governmental agencies in certain foreign countries regarding the results of our investigations to date. We are cooperating with the DOJ and SEC in connection with their review of these matters and the outcome of these, or any future matters, cannot be predicted. The FCPA and related statutes and regulations provide for potential monetary penalties, criminal sanctions and in some cases debarment from doing business with the U.S. federal government in connection with FCPA violations, any of which could have a material effect on our business.And in an 8-K -- a filing to report something that might have material impact on the business -- Oracle wrote the following:
On May 8, 2009, Oracle Corporation ("Oracle") confirmed that, prior to its signing of the definitive agreement to acquire Sun Microsystems, Inc. ("Sun"), Oracle had received disclosures from Sun regarding the potential violations of the Foreign Corrupt Practices Act, which were disclosed in Sun's Form 10-Q for the quarterly period ending March 29, 2009, filed with the U.S. Securities and Exchange Commission on May 8, 2009.In other words, Oracle apparently did know about the problem before signing the final version of the M&A agreement to acquire Sun. And yet, according to Tillen, a filing by Sun on May 12 included the M&A agreement with the warranty that Sun hadn't violated the FCPA.
Oracle said that it would not comment and Sun would only point me to its 10-K filing and Oracle's 10-Q. But as Tillen notes, it's likely that this issue came up during Oracle's due diligence for the Sun acquisition. Given how long it takes FCPA investigations to take place, there is little chance that the issue would be resolved before this summer, which is when the two companies anticipate that the merger will be completely. That would have left Oracle with three options:
- Get Sun to deal with the problem before the acquisition is completed.
- Take a chance on the outcome.
- Get enough of a discount on the price that doing the deal still makes sense.
And as The Register neatly noted, Sun's filings with the SEC turned up another interesting fact from Sun:
Oracle sent a letter to our board proposing the acquisition by Oracle of certain of our software assets, a minority equity investment by Oracle in our common stock and entering into certain strategic relationships. On March 16, 2009, our board met with management and our advisors to discuss Oracle's proposal and the board's fiduciary obligations.So Oracle was completely uninterested in the hardware business and only wanted the software side of the house. As some experts are speculating, Oracle will turn around and sell the hardware business to Fujitsu, neatly extricating itself from competing with its business partners. Sun has admitted that it shopped itself here, there, and everywhere for an acquisition. Could it be that the FCPA issues came up before? Perhaps some IBM due diligence turned up the same thing, causing the company to suddenly lower its bid, which led to the breakdown of an IBM-Sun deal? And perhaps the combination of the FCPA problem, Oracle's disinterest in the hardware business, and Sun's lack of options means that no matter how much the investors squawk, this is as good as it will get.
Payoff image via stock.xchng user svilen001, standard site license.