Oracle to Weigh Options

By Renee Boucher Ferguson  |  Posted 2007-10-12 Print this article Print

after BEA Snub"> Oracles $6.7 billion bid for BEA represents a 24.8 percent premium over BEAs closing price Thursday of $13.62 per share. Bernstein Research analyst Charles Di Bona said in a Oct. 12 research note that based on his companys analysis "we view this transaction as financially unattractive for Oracle, yielding a return on investment below Oracles cost of capital and reasonable hurdle rates, despite the higher risks associated with a larger merger and what we expect to be only limited technology synergies. Di Bona noted that BEA has a "poison pill" provision in its bylaws; Oracle would most likely need the approval of BEAs board to complete the transaction.
A poison pill strategy is used by corporations to discourage hostile takeover bids. Given BEAs steadfast desire to remain independent despite years of speculation that it would be acquired by Oracle, Oracles offer could be construed as hostile.
BEAs buyout rejection is not the first for Oracle as a suitor. In 2003 Oracle filed suit against PeopleSoft alleging that the company and its Board breached their fiduciary responsibility to shareholders by refusing to revoke its poison pill and allow Oracles takeover. Oracle ultimately reached a buyout agreement with PeopleSoft after increasing its offer several times and after a prolonged legal battle in which Oracle overturned a U.S. Justice Department effort to block the merger. Bernsteins Di Bona said that in light of BEAs performance in the market, Oracle could be making the wrong moves. "We continue to have deep-seated doubts about BEAs near-term growth prospects, which give us cause for concern about this deal," wrote Di Bona. "While we understand that buying BEA as a purely financial move – to gain access to its installed base of maintenance-paying customers – might be attractive for Oracle, at a price, we believe that it does not make financial sense at the proposed $17 per share level." Later in his note Di Bona speculated that with BEAs shares trading Friday about $1 above Oracles offering price, there is some speculation that BEA could force Oracle to raise its bid as high as $20 a share. "We feel that the economics of the proposed transaction are already tenuous at $17 per share, and become increasingly unattractive as the offer price moves higher." But with BEAs decline of Oracles offer today, Oracle has two clear choices in front of it: either accept BEAs rejection and drop the deal—an unlikely scenario given Oracles aggressive acquisition strategy—or raise its offering to a price more amenable to BEAs Board. If recent history is any lesson, Oracle will take BEAs bait. But BEAs refusal to accept Oracles bid also opens the doors for other suitors to step in. The front runners include IBM, SAP and HP. Read more here about what could convince BEA to accept an Oracle bid. IBM currently has its own middleware stack with WebSphere but could be interested in BEA to ward off further competition from Oracle (the two already compete heavily in the database market). Analysts believe HP is interested in expanding into the middleware market by either buying BEA or Tibco Software, a middleware stalwart. Then theres SAP, which has battled with Oracle since Oracles acquisition of PeopleSoft, a move Oracle officials said at the time was made specifically to knock SAP out of its top spot in the worlds business applications market. Peter Goldmacher, a research analyst at Cowen and Co., wrote in an Oct. 12 research not that SAP wont—or at least shouldnt—let BEA get away without a fight. "We believe that if SAP lets [BEA] get away, its weakening position in the software pantheon will accelerate as it is increasingly relegated to niche vendor status." SAP did somewhat of an about-face in its acquisition strategy earlier this week with its announcement Sunday that it would acquire Business Objects. In the past SAP, countering Oracles approach, said it would acquire small "tuck in" companies to bolster its technology stack. SAP agreed to pay $6.8 billion for Business Objects. Editors Note: This story was updated to include quotes from Oracle President Charles Phillips letter in response to BEAs rejection of Oracles acquisition bid. Check out eWEEK.coms for the latest news, views and analysis on servers, switches and networking protocols for the enterprise and small businesses.


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