Reviews may delay Sun buy; Goldman likely to thin deal backlog; CIT bankruptcy fears persist

By Cristal Cody

Tupelo, Miss., Aug. 18 - Investors continue to wait for the European Commission's antitrust decision on Oracle Corp.'s $5.60 billion acquisition of Sun Microsystems, Inc.

The commission's decision could push the merger's closing into 2010, an analyst said Tuesday.

Looking ahead, a market analyst said Tuesday that Goldman Sachs Group, Inc. is poised to improve its mergers and acquisitions activity later this fall.

In other situations, potential bankruptcy concerns continued to swirl around CIT Group, Inc. even as investors drove its shares up in trading.

Meanwhile, equities rallied on Tuesday.

The Dow Jones Industrial Average closed up 82.60 points, or 0.90%, at 9,217.94 on Tuesday.

The Standard & Poor's 500 index rose 9.94 points, or 1.01%, to 989.67. The Nasdaq Composite index closed up 25.08 points, or 1.30%, at 1,955.92.

Reviews dictate Sun timeline

The European Commission's review of Oracle's takeover of Sun Microsystems is expected to expire on Sept. 3.

The companies have said the $9.50-a-share cash deal should close in late August.

A market source said Tuesday that the commission could approve the transaction after its phase 1 investigation or refer the deal for an extended phase 1 review or for a phase 2 review.

"Given that remedies could be difficult to structure, it is possible that the transaction will be referred to a phase 2 review," the source said.

The transaction also must receive antitrust approval in Canada, China, Israel, Switzerland, Russia, Australia, Turkey, Korea, Japan, Mexico and South Africa.

The transaction could close by early October if the U.S. Department of Justice gives the transaction antitrust clearance and the European Commission approves the deal, the source said.

But if the commission refers Sun's takeover for an extended review, the deal's closing could be pushed to as late as February, the market source said.

If an extended review "is not announced next week, we expect the gross deal spread to widen," the source said of Sun's stock. "We believe that there is a low probability that the deal will break, although in that event, the potential loss could be substantial."

Santa Clara, Calif.-based Sun, a maker of network computing infrastructure products, announced the merger with Redwood Shores, Calif.-based software maker Oracle on April 20.

Shares of Sun added 4 cents, or 0.44%, to close Tuesday at $9.22.

Oracle's stock rose 18 cents, or 0.84%, to $21.58.

Thinning deal backlog

Meanwhile, a market analyst said Tuesday that Goldman Sachs' deal backlogs are showing signs of improvement from levels seen in the first quarter.

"We are further encouraged by indications that the macro backdrop for both M&A and equity issuance has improved," the analyst said. "Coupled with a contraction in debt spreads, what appears to be a stabilizing equity market and an improvement in CEO confidence, we suspect that GS may be able to begin monetizing the improved backlog."

In fact, "banking backlogs imply post-Labor Day activity," said the analyst, who now targets Goldman Sachs' stock at $210.00 a share.

"The industry M&A backlog is up 6.00% since the end of 2008 and the IPO backlog is up 13.00% from the end of second quarter '09," the analyst said. "GS' backlogs are up 20.00% and 32.00%, respectively. Steady improvements in both the equity and debt market throughout the year and into the summer will likely provide the needed confidence post-summer."

Shares of Goldman Sachs closed up $3.23, or 2.05%, at $160.48 on Tuesday. The New York-based banking, investment and securities firm's stock has traded from $47.41 to $172.45 over the past year.

CIT's ongoing concerns

CIT shares closed up 4 cents, or 2.94%, at $1.40 on Tuesday.

A day earlier, the lender reported a loss of $1.68 billion, or $4.30 per share, in the second quarter ended June 30, compared with a loss of $2.08 billion, or $7.88 per share, in the period a year ago.

Bill Carcache, an analyst with Fox-Pitt Kelton Cochran Caronia Waller LLC, said Tuesday in a research note released to Prospect News that he is maintaining his $1.25 stock price target.

"Our base case EPS estimate for 2009 goes to a loss of $8.03, from a loss of $4.18, and 2010 goes to a loss of $1.11 from a profit of $0.83," he said.

The New York-based lender to most of the country's small retail companies received a $3 billion loan in July from its bondholders. CIT also completed buying back nearly $600 million in debt on Monday.

CIT has $13.80 billion of debt due in the next 12 months and said it still may file for bankruptcy protection.

"The company estimates that its unsecured debt funding needs for the 12 months total about $8 billion, including $3 billion in [the second half of the year]," Carcache said. "The company will need to extend debt maturities or sell assets to generate sufficient cash to satisfy its funding needs."

Mentioned in this article:

CIT Group, Inc. NYSE: CIT

Goldman Sachs Group, Inc. NYSE: GS

Oracle Corp. Nasdaq: ORCL

Sun Microsystems, Inc. Nasdaq: JAVA

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