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BEA Systems rejection of its initial bid overture leaves Oracle several options: Oracle can take the rebuff for what it is and leave the dance floor; or it can ante up as much as $3 more per share, some analysts believe.
Oracle can also file legal action against BEA, with the intent of getting it to remove the poison pill provision from its bylaws.
Oracle is pondering these options because the BEA Systems Board of Directors, in a Oct. 11 letter gave a polite thanks, but no thanks to Oracles bid, submitted two days prior, to acquire BEA at $17 a share, or about $6.66 billion. BEAs Board of Directors contended Oracles bid “substantially undervalues” the company.
Oracle President Charles Phillips later on Oct. 12 replied to BEAs answer with a letter indicating that Oracle was not prepared to increase its offer.
“Our proposed price is a substantial premium to an already-inflated stock price that reflected speculation of the potential sale of BEA and represents a more than 40% premium to BEAs stock price before the appearance of activist shareholders in mid-August of this year,” Phillips wrote.
He also disclosed in the letter that the two companies were planning to meet Friday morning at 10 a.m. “to commence a process intended to result in the execution of definitive agreements before the open of business” on Oct. 15. However, BEA cancelled that meeting late Thursday night and “declined our invitations to reschedule,” Phillips letter said.
Phillips wrote the Oracle, however, remained ready to proceed “with a process that would lead to a friendly transaction.”
Boston Corporate Finance analyst Murray Beach said in an Oct. 12 research note that it believes Oracle would be willing to pay more for BEA than their current offer, but that any increase “could push the valuation into a zone that is tough to justify.” He pointed to HP, Microsoft, IBM and Computer Associates as other possible suitors.
Click here to read more about what a BEA buyout might mean for Oracles Fusion Architecture.
BEAs rejection leaves the door open for additional suitors that might be interested in bidding on the company. For example analysts believe SAP might counter Oracles offer. A “private equity play is possible, but not likely,” wrote Beach.
BEA appears to be holding out for a higher bid despite the fact that BEA has been under performing in the market and has been unable to state its earnings since 2006 due to a stock option snafu.
“It is apparent to our Board…that BEA is worth substantially more to Oracle, to others and, importantly, to our shareholders than the price indicated in your letter,” reads the reply, signed by William Klein, and posted on BEAs Web site.
“As we have indicated to you previously, we believe that the absence of current financial information in the public markets limits investor visibility into our performance. We expect that this will be corrected in the near future when we become current on our SEC filings, and can communicate more fully with the investment community.”
The letter, addressed to Oracle President Charles Phillips, requests more clarity in Oracles stated plans to “proceed….to a process” that leads to a definitive agreement.
“As we have made clear to you in previous discussions, we are very sensitive to the fact that Oracle is a direct competitor of BEA,” reads the letter. “Therefore, the Board cannot consider any process which is long in duration, open-ended in nature, or would divulge competitively sensitive information which could materially harm our business and our shareholders interests.”
Click here to read whether BEAs rejection of the initial buyout bid will prompt Oracle to up the ante.
In its disclosure on Oct. 11 that it had presented a letter of intent to BEAs Board, Oracle said it was basing its acquisition bid on previous conversations with BEA.
“We have made a serious proposal including a substantial premium for BEA,” said Phillips, in a statement. “We believe our all cash offer provides the best value for BEAs shareholders and the best home for BEAs employees and customers. This proposal is the culmination of repeated conversations with BEA management over the last several years.”
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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.
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