For purposes of this exercise, assume that you are the manager of a mutual fund specializing in corporate bonds. Your clientele are mostly 45 and older, risk-averse, long-term investors. Remember that there are countless mutual funds your investors can turn to; unless you continuously produce higher returns than other funds without incurring serious risks, your investors will turn elsewhere. Currently your fund includes a wide variety of bonds from different large corporations, but none from the high-tech sector.
Oracle, the largest database company in the world has gone to the market more than once with a large bond offering, raising capital to pursue acquisitions. Oracle has spent more than $25 billion the past three years buying a long list of competitors -- notably, PeopleSoft, Siebel Systems, and Hyperion Solutions. Access to capital markets is relatively rare by high-tech corporations; they have a record of being able to fund their acquisitions out of current cash. Most high-tech companies have steered clear of debt financing, preferring to spread equity, which has a record of much more rapid accumulation in the high-tech context. However, the consolidation of the software industry is proceeding at a rate such that future acquisitions will be relatively larger scale, and recourse to debt financing may be increasingly in the works for the industry.
You are now faced with a certain dilemma. You know a good deal about the debt/bond market, but not a whole lot about the high-tech sector and its financing mechanisms. But your investors follow the news as much or sometimes better than you do, and they're quite aware that Oracle is the largest software company after Microsoft, and is close to what passes for a blue-chip in the software business, as there is. As it is, many of your investors are wondering why you haven't included Oracle?s bonds as part of your mutual fund?s portfolio thus far, and they're calling this to your attention (bond investors tend to have fairly substantial pots of money, a lot of time on their hands, access to the Internet, often a restless curiosity somewhat offset by a general lack of information about finance and financial markets, and an almost indefinite ability to reach you on the telephone at odd hours of day or night).
You're going to need to do some research on Oracle [http://www.oracle.com/index.html] including their financial situation as well as their overall strengths as a corporation. You'll also need to know something about the economic climate in which the corporation operates, its prospects for the future, and its ability to leverage funds as necessary. Keep in mind that having a strong reputation as a technology company does not mean the returns on their bonds will be higher than bonds from lesser known corporations.
As noted earlier, you should consult material from the Background Readings or related other materials you find yourself (be sure to reference properly whatever specific sources you draw on); searches on Google [www.google.com] or Yahoo [http://finance.yahoo.com] or other sources to follow up on points raised in these articles or other issues discussed in the Background Information will amply repay the effort you invest in them (see, investment is everywhere!).
When you've read through the articles and related material, scanned the websites, and thought about it carefully, please compose a five page paper on the following topic:
Would you choose to invest in Oracle's bonds as part of your investment portfolio? Why or why not? If so, what sort of strategy would you pursue?
In the course of preparing your paper, you will probably want to think, about, among other things, issues such as:
Risk of this debt ? both in terms of default risk and from the price decreases
Current price of Oracle?s bonds ? overvalued or undervalued?
Your opinion about Oracle?s purchase of Siebel Systems ? remember, if the merger goes well the value of Oracle?s debt will increase.
A five page paper detailing whether you would choose to invest in Oracleâ??s bonds.
Running head: ORACLE'S BONDS
Oracle is a software solutions company that produces a wide range of products that includes application software, database and middle software suites and services supporting standard technology platforms and application implementation related training. Company operations are categorized into software and services. Software business is further classified into new software licenses and software license updates while the service segment is classified into consulting, on demand and education (Company Spotlight, 2010).
Oracle database is a popular database that enables secure storage, retrieval and manipulation of all forms of data and also sells products that are complimentary to its database product offerings. It has a robust share in most of the markets it serves and had a relational database management systems market of 48.6 % in 2007. The company is ranked the second in enterprise resource planning software market and a leading company in the customer relationship management market. Due to its robust market position it enables the organization to have competitive advantage, expand market share and generate profits. The company has experienced inorganic growth strategy by acquiring other smaller firms. The company has been making acquisition of complimentary firms, products, technologies and services. Oracle acquired PeopleSoft in 2005, Siebel Systems in 2006, Hyperion Solutions Corporation in 2007, and BEA in 2008.
Due to the company's acquisition in recent period it as led to a high debt profile. Company Spotlight (2010) provides that the company's long term debt increased from $ 163 million in the financial year 2004 to $ 10,235 million in financial year 2008. Oracle's debt to equity ratio over that period increased from 0.02 to 0.4. The company's interest coverage ratio reduced despite recording increase in registered profit margins. High debt in the company's capital structure identifies the fact that the company has low financial flexibility. If the company continues to register increase in debt it will adversely affect the organization's ability to acquire funds to finance future business ventures.
Most recent quarter results show that the company generated revenue amounting to $ 35.62 billion and a profit margin of 23.99%. Oracle's financial statements provide that the company has incurred debt amounting to $ 15.92 billion, has a total debt to equity ratio of 0.3956 (Yahoo Finance, 2011). This confirms the fact that the company has taken up tremendous debt when compared to value of equity the company has. Additional debt will reduce the amount equity available in the company to cover the value of company debt if the organization ...
The expert determines whether they would invest an Oracle's bond in your investment portfolio.