PeopleSoft Inc. stock is now trading close to Oracle Corp.s ultimate buying price of $26.50 per share—a price that some financial analysts say reflects an Oracle-supplied, optimistic premium on what the company would be worth outside of the deal.
"PeopleSoft as a standalone entity was probably not worth $20 per share," said John DiFucci, a managing director at Bear, Stearns & Co. Inc. in New York. The pumped-up price reflects Wall Streets faith in Oracles ability to turn the merged outfit into a lean software machine that will operate with fewer costs and will drive home more revenue, he said.
"I think its good for Oracle, and its good for the industry," DiFucci said, because Oracle CEO Larry Ellison has been right all along in saying that the industry has been in need of consolidation.
"Frankly, I dont think well see a return to double-digit growth, at least not on a long-term basis, this year or next year," he said. "Assuming all that, and assuming a lot of software companies came about or proliferated during the [dot-com] bubble, you come to the conclusion that we have too many out there, and there has to be a rationalization of the industry."
The deal also sent Oracle stock up almost 10 percent, largely due to the markets love for certainty, according to Tom Burnett, president of New York-based Merger Insight, an affiliate of Wall Street Access. "The market loves getting rid of the uncertainty," he said. "Its a very good move for Oracle. The board distraction was beginning to take a big toll."
Oracle executives have forecast the deal as promising to be 8 cents accretive by next year—in other words, the merger will add 8 cents per share to the bottom line.
The raw translation of that promise means that many PeopleSoft employees will lose their jobs, as Oracle squeezes redundancies out of the merged companies. Donovan Gow, an analyst for American Technology Research, in Greenwich, Conn., predicted that more than a few thousand employees will be considered redundant, and that the bulk of the victims will come from PeopleSofts ranks.
"There will be massive head-count reduction across the combined firms," he said. "I would presume the bulk will come from the PeopleSoft side."
Of course, many PeopleSoft personnel may jump ship rather than work for the company they have long regarded as a bitter enemy. "Oracle is considered a more aggressive, hard-hitting, less friendly type of corporate culture," Gow said.
"PeopleSoft has been viewed as a nicer place to work: more enjoyable, more camaraderie, more laid-back, less hard-hitting. Thats why they brought over [former PeopleSoft CEO] Craig Conway from Oracle: to instill a little more competitiveness to PeopleSofts environment."
Regardless of Conways tenure, PeopleSoft still has a different culture that will entail a tough adjustment for of its employees, many of whom will likely leave.
But from a financial perspective, that will work in Oracles favor, according to DiFucci. "The PeopleSoft culture will be destroyed here," he said. "The Oracle culture will dominate. … That kind of integration, [which is just about rationalizing the industry], is not as risky as a lot of acquisitions.
"Youre just buying a customer base, which is reflected by the maintenance stream. … When youre integrating people, thats where the risk comes in: with integrating the culture."
In a conference call Monday morning wherein he discussed the companys quarterly financial results, Ellison said Oracle will refrain from swallowing other big companies until it has properly digested PeopleSoft. He left open the possibility that Oracle will acquire smaller companies, however—in other words, those smaller than $200 million.
Ellison didnt specify whether he was referring to revenue or market cap, but DiFucci, for one, assumed he meant revenue. That means bad news for companies with an acquisition premium built in, if they in fact have revenue over Ellisons stated cutoff point.
"You have to keep in perspective what Oracles best interests are. Its been very public what theyve been considering," he said, adding that Ellison is not shy about stating Oracles intentions to pursue other acquisitions.