KKR in $700m deal with Sun

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Kohlberg Kravis Roberts & Co on Tuesday announced a $700m investment in Sun Microsystems, a former Silicon Valley high-flier that until recently had been given up for dead by Wall Street as a victim of the tech bust and changing IT buying habits by large companies.

The investment, which also involves the blue-chip buy-out firm taking a seat on Sun’s board, is one of the most striking deals yet in a wave of transactions that has brought private equity money into the tech industry. It also highlights the increasing audacity of private equity firms as they seek to spend the billions of dollars raised in recent years, including their willingness to consider deals other than full buy-outs that given them less influence.

Under the terms of Tuesday’s deal, KKR will invest $700m in two tranches of convertible securities that are convertible into Sun shares $7.21 a share. News of the deal sent Sun’s shares up by more than 8 per cent in after-market trading, to $6.13.

Sun’s rock-bottom share price after the tech bust, at one point valuing it at little more than the cash on its balance sheet, made it one of the most talked-out buy-out candidates in Silicon Valley in recent years. However, the company’s shares had already jumped by 48 per cent from a low point touched last summer, taking them to a four-and-a-half year high, on hopes that it was finally on the road to recovery.

“We certainly don’t need the money – it’s an opportunitist transaction,” said Jonathan Schwartz, Sun’s chief executive officer. Sun, which already has $3.5bn of cash and marketable securities and is cashflow positive, will use the money “to pursue strategic opportunities for growth,” he added. He also said that, given its prominence in the financial services industry, the endorsement from KKR might help Sun win more business in one of its biggest markets.

KKR’s investment came as Sun registered further headway in the restructuring that has been underway since Mr Schwartz took over as CEO early last year. The company said it had shed 1,600 jobs in the lastest quarter, helping lift it back into profit in the final months of last year. Revenues also topped estimates for the quarter as corporate buyers showed signs of revived interest in two new lines of servers from the company.

The minority investment in a public company echoes Blackstone’s controversial move last year to take a 4.5 per cent stake in Deutsche Telekom and gain a seat on the supervisory board of the German telecoms group. Some critics questioned whether it was in the interests of Blackstone investors to pay the firm large management fees for the purchase of a minority equity stake.

KKR is making its investment in Sun through a $5bn investment vehicle that it listed on the Amsterdam stock exchange last year.

While most of that money is designated for investments in the traditional KKR funds and co-investments on KKR deals such last year’s takeovers of HCA, the hospital chain, and the chip division of Philips, up to 25 per cent of the fund is earmarked for “opportunisitic” investments.

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