Analysts Wobble on Question of PeopleSoft Cost

Now that Oracle Corp.s initial $16-per-share bid for PeopleSoft Inc. has been curtly dismissed by PeopleSofts board of directors, some financial analysts are estimating that not only will the takeover be successful—eventually—but that the final sale price could hit as high as $26 per share.

Trip Chowdhry, senior software analyst for FTN Midwest Research Securities Corp., said that the merger between the two companies just makes too much sense to fizzle. “Oracle has the best database on the planet, and PeopleSoft has the best applications suite on the planet,” said Chowdhry, in Cleveland. “Merging the two will position Oracle/PeopleSoft ahead in both technology as well as customer support, and this combination can win against SAP [AG], Siebel [Systems Inc.] and Microsoft [Corp.]”

Chowdhry said the $16 bid is “extremely low” and that the “right price” is actually $26 per share. His calculations take into account the fact that PeopleSoft has $2 billion in cash and, by his estimation, that for the next five years the company will generate about $800 million per year in maintenance revenues. Discounted at the rate of 5 percent, that puts the value at about $3.4 billion.

Add to that the $2.9 billion value of PeopleSofts 5,800 customers, which Chowdhry arrived at thusly: Each customer costs about $500,000 to acquire, given lengthy sales cycles and teams of about five sales representatives per account. Altogether, that puts the company at a value of about $8.1 billion, which when divided by 320 million outstanding shares would make the share price $26.

Would—could—Oracle pay that? Chowdhry said it can and will, and the motivation will have nothing to do with PeopleSofts announcement early last week that it would acquire J.D. Edwards & Co. Rather, it all comes down to fending off Microsoft, which has grown strong from fattening itself on recent acquisitions of business applications/CRM/human-resource management/manufacturing/distribution players such as Great Plains Software Inc. and Navision.

“Without acquiring PeopleSoft, Oracle may be less relevant because Microsoft is moving aggressively,” Chowdhry said. “J.D. Edwards is totally irrelevant. The reason is Oracles intent is to fend off Microsoft and to prevent themselves from getting commoditized in the database market. And the only way to do that is to have a strong applications suite.”

Other analysts, however, believe that PeopleSoft isnt worth much more than the $16 a share Oracle offered, thanks to the fact that Oracle offered it. In other words, the bid is a self-fulfilling prophecy in that it will stir up fear, uncertainty and doubt amongst PeopleSoft customers for a long time to come, thus lowering the companys value.

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“The bid of $16 a share isnt really that low,” said Cheng Lim, a research analyst at Fulcrum Global Partners LLC, in New York. “The fact that Oracle has done this at all creates a vicious cycle where customers wont gravitate to PeopleSoft, knowing theres this hostile takeover hanging over it. They want to do business with financially more-stable companies.”

And Paul Hsi, an analyst at Moodys Investors Service, in New York (which recently downgraded Oracles rating), said that the $16 bid was more a strawman bid than anything—a pre-emptive strike against bids coming from other sources, such as Microsoft.

Brian Skiba, global technology analyst at Deutsche Bank in New York, said he expects Ellison to take the deal directly to PeopleSofts shareholders, perhaps as soon as tomorrow.

“People on Wall Street are trying to figure out what could Oracle pay, will they pay higher than $16 a share. The question is what would they pay. I dont think any of us market analysts can really get inside Larry Ellisons mind.”

Skiba said he didnt take PeopleSofts antitrust claims seriously and that the Board may consider a better offer.

“The next moves on Ellison,” he said. “He can revise his bid upward or place his cards down, and say good luck, youre dead anyway. Hes already killed PeopleSofts business for June.”

Senior Writer Dennis Callaghan contributed to this story.