Market concerns crowd Sun buyout; investors mull Sepracor bid; regulators could delay BJ deal

By Cristal Cody

Tupelo, Miss., Sept. 3 - The European Commission's move to extend the antitrust review of Oracle Corp.'s $7.4 billion takeover of Sun Microsystems, Inc. clearly has some investors worried, an analyst told Prospect News on Thursday.

In other situations on Thursday, Dainippon Sumitomo Pharma Co., Ltd. said it will acquire Sepracor Inc. for $2.6 billion, a fair bid but one that could've been a bit higher, an analyst said Thursday in an interview.

Meanwhile, a market observer said Thursday that the biggest risk to Baker Hughes Inc.'s $5.5 billion cash-and-stock acquisition of BJ Services Co. could be timing.

On Wall Street, stocks made a turnaround on Thursday.

The Dow Jones Industrial Average picked up 63.94 points, or 0.69%, to close at 9,344.61.

The Standard & Poor's 500 index added 8.49 points, or 0.85%, to end at 1,003.24, and the Nasdaq Composite index rose 16.13 points, or 0.82%, to 1,983.20.

European regulators set sights on Sun

The European Commission said in a statement on Thursday that it will conduct an in-depth investigation into Oracle's buyout of Sun Microsystems over concerns it could harm competition.

The commission said its decision will be due by Jan. 19 - which sets the acquisition's closing back by months.

Oracle originally had expected the deal announced in April to close in August.

"A lot more people are worried about it, as evidenced by the stock getting hit," Brent Williams, an analyst with the Benchmark Co., said in an interview with Prospect News on Thursday. "There are a lot of people surprised at the moment."

The European Commission notes the transaction would bring together two major database competitors. Oracle is the market leader in proprietary database software, while Sun's MySQL database is the leading open-source product.

"Databases are a key element of company IT systems," competition commissioner Neelie Kroes said in the statement.

"In the current economic context, all companies are looking for cost-effective IT solutions, and systems based on open-source software are increasingly emerging as viable alternatives to proprietary solutions," Kroes said. "The commission has to ensure that such alternatives would continue to be available."

Santa Clara, Calif.-based software maker Oracle acknowledged the review in a statement Thursday and noted that the U.S. Department of Justice approved the proposed acquisition without conditions last month.

Investors now wonder if the uncertainty will affect Sun's business since the company has lost market share on concerns about its future under Oracle, Williams said.

"There's some concerns going that if the commission sits on this for six months and then allows the deal, what kind of business is Sun going to be in," Williams said. "Customers could end up holding off buying more hardware."

The $9.50-a-share cash acquisition of Redwood Shores, Calif.-based Sun, maker of the popular Java programming software as well as network computing infrastructure products, also requires antitrust clearances by a number of countries, including Canada, China, Israel, Switzerland, Russia, Australia, Turkey, Korea, Japan, Mexico and South Africa.

Shares of Sun Microsystems shed 17 cents, or 1.82%, to close at $9.15 on Thursday.

Oracle's stock fell 21 cents, or 0.96%, to $21.56.

Dainippon casts net for U.S. toehold

Dainippon's $23.00-a-share offer represents a 27.60% premium over Sepracor's closing stock price of $18.03 on Tuesday after reports of a deal began to surface.

Shares of the Marlborough, Mass.-based specialty pharmaceutical company added 5 cents, or 0.22%, to close Thursday at $22.85. The stock has traded from $9.83 to $23.57 over the past year.

Osaka, Japan-based Dainippon plans to start the tender offer by Sept. 15.

"It appears beneath the premiums that were paid for other companies prior to the financial calamities over the last months," Robert Hazlett, an analyst with BMO Capital Markets Corp., told Prospect News on Thursday. "We understand why the deal is priced where it is, but we would love to see a tad bit more of a premium."

The transaction was unanimously approved by the boards of both companies.

Sepracor markets products that include the insomnia drug Lunesta, the bronchial drug Xopenex and allergy nasal spray Omnaris. Sepracor's subsidiary, Sepracor Pharmaceuticals, Inc., markets additional products in Canada that are focused on cardiovascular problems, central nervous system disorders and infectious diseases.

Dainippon, also called DSP, said in a statement that the acquisition accelerates the company's vision of becoming a leading global pharmaceutical company.

The drug company said it expects the transaction will give it "access to a fully integrated U.S.- and Canadian-based pharmaceutical platform" and add Sepracor's development of potential new drugs.

Adrian Adams, president and chief executive officer of Sepracor, said in a statement that the combination is in the "best interest of our shareholders" as well as employees.

"DSP is a leading Japanese pharmaceutical company with a distinguished history and an established, strong track record of operational and financial performance based on a number of successful product launches," he said.

DSP said it will finance the acquisition using committed bank facilities and existing cash resources, but the closing is not contingent on financing.

The companies expect the tender offer to close in the fourth quarter after it receives U.S. regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act.

Hazlett said the deal lacks any regulatory concerns.

"The other company has some opportunities in the CNS area, but none that materially overlap with Sepracor," he said.

Markets eyes BJ deal timing

Baker Hughes expects its buyout of BJ Services to close by the end of the year, but the deal could settle later if regulators take a closer look, a market source said Thursday.

"Although we regard it as unlikely, a second request or E.U. Phase 2 review could push the completion of the merger into mid-March," the source said.

The deal will require regulators' approval in the United States and potentially in the European Union, but it is ultimately expected to receive antitrust clearance and approval from both Houston-based companies' shareholders, the source said.

"We believe that competition issues are unlikely, as BJ only has a strong market presence in areas like pressure pumping and coiled tubing, in which Baker Hughes has little presence," the source said.

"Although the premium Baker Hughes is offering for BJ is conservative, we believe that BJ shareholders are likely to vote in favor of the transaction," the source said. "In addition, integration risk is minimal, as Baker Hughes and BJ already work together on several projects, and BJ was spun off from Baker Hughes in 1990."

Baker Hughes said it will pay $2.69 in cash and 0.40035 of a share for each BJ share as a way to boost its presence in the international oilfield services industry.

BJ's stock added 21 cents, or 1.29%, to close at $16.53.

Shares of Baker Hughes closed up 62 cents, or 1.77%, at $35.63 on Thursday.

Mentioned in this article:

Baker Hughes Inc. NYSE: BHI

BJ Services Co. NYSE: BJS

Oracle Corp. Nasdaq: ORCL

Sepracor Inc. Nasdaq: SEPR

Sun Microsystems, Inc. Nasdaq: JAVA

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