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Issue Date: January 2008

BEA bows to Oracle's $8,5bn offer

January 2008
Madan Sheina

After months of squabbling over price, BEA systems has agreed to be acquired by its relentless suitor Oracle in a cash deal worth $8,5bn.

The purchase price of $19,375 per share represents a 24% increase from BEA's closing stock price on Tuesday and is a 42% improvement from where BEA's shares stood before Oracle launched an unsolicited, and snubbed, bid of $17 per share three months ago. Oracle's original bid valued the company at $6,7bn. Instead BEA raised the sale price of $21 per share, which Oracle quickly dismissed as being unrealistic.
What then ensued was a sneaky game of cat and mouse-cum bluff, with Oracle CEO Larry Ellison publicly declaring that Oracle was not prepared to raise its bid and BEA stating that it would court other buyers prepared to meet a higher price. With hindsight this was clearly gamesmanship from both sides that would have graced any Las Vegas poker table, with many industry pundits believing it would only be a matter of time before BEA became Oracle property.
This might seem like an expensive deal on paper. But part of Oracle's expense will be offset by $1,3 billion in cash that it expects to inherit from BEA once the deal closes later this year - probably in October. Furthermore Oracle is set to add $1,67bn in expected 2009 revenue from BEA to its top line.
Oracle will get its hands on an industry-leading portfolio of middleware technology that allows business software to interoperate - technology that Oracle has sought for so long - if only to tie together its own largely acquired suite of business tools and applications gained from the likes of PeopleSoft, Siebel Systems, Retek, Hyperion Solutions and others.
BEA's software is mature and proven in 15 000 companies worldwide.
Its AquaLogic software is a technically sound platform and its WebLogic communications software for telecoms will also fill a gap in Oracle's software portfolio as well. It is rumoured that BEA did not have sufficient resources to effectively market the product. If that is indeed true then Oracle should have no trouble with its slicker and well resourced marketing muscle.
BEA will also give Oracle a much needed boost in an area that it has tried, and arguably failed, to address with its own Fusion initiative. Product overlaps between the two sets of middleware do exist, though BEA's are thought to be far superior to Fusion.
It will be interesting to see if Oracle now uses BEA to integrate the dozens of software applications that it has acquired in-house, perhaps as a proof-point of BEA's robust capabilities. After all integrating Oracle's diverse suite of business applications will be as challenging as any global Fortune 100 firms'.
"This combination with BEA gives us what we need - a leadership position in every level of the software stack," said Ellison said in a conference call yesterday.
Ellison also said that BEA allows it to be a one-stop-shop for enterprise software, a position for which the goalposts are shifting more broadly with each software merger and acquisition today.
"For Oracle, this deal is a very big step toward completing our vision of becoming a strategic enterprise software vendor of choice for our customers," Ellison said.
Ellison must be a satisfied man this week. It is no secret he has been stalking BEA for several years before finally tendering an offer last October. That was after one of BEA's major investors, billionaire Carl Icahn, called for BEA's board to take steps to boost the company's flagging share price. BEA's refusal to negotiate with Oracle clearly irked Icahn, who threatened to lead what amounted to a shareholder mutiny. How is he feeling now?
Pretty pleased given that he is selling off a 13% stake in the firm at nearly a 25% premium.
"This transaction is an excellent example of the great results that can be achieved for all constituencies when the shareholder activist is able to work cooperatively with management," Icahn said in a statement that visibly grinned at you from the page.
Less happy might be a large chunk of BEA's 4100 employees who might be excused for dusting off their resumes this weekend. Industry observers agree that Oracle is more than likely to eliminate overlapping and redundant jobs in BEA's administrative, sales and marketing departments. However Oracle will probably (and wisely) hold on to BEA's product engineering staff.
During the conference call yesterday Ellison, rather predictably, was not too specific about possible layoffs in the wake of the merger. But he did pledge to keep a significant number of BEA's sales reps on board.
The acquisition extends a seemingly endless acquisition spree by Oracle which has spent a staggering $35bn buying dozens of its smaller competitors. The acquisition is Oracle's third-largest ever software deal and the most it has spent since its mammoth $11,1bn purchase of PeopleSoft in early 2005. Interestingly that acquisition also went through several months of acrimonious resistance and negotiation as well.
Reaction to the news from SAP, which is busily trying to digest its own big acquisition - Business Objects - came in fast and sharp.
"It is a sign that Oracle's Fusion middleware, which it began delivering to customers in 2008, is in trouble," said Bill Wohl, vice president of strategic communications at the German software maker. Wohl called Oracle's acquired technologies a 'spaghetti ball' of complex software.
"They have spent over $30bn trying to catch up with us, yet funnily enough we still gain market share."
BEA's shares surged 18,5%, or $2,88, to close on Nasdaq yesterday at $18,46. Meanwhile Oracle shares added rose a more modest 2,8%, or 61 cents, to close at $21,92.
Our view
Thankfully this dogged episode of cat-and-mouse and bluff, which quite frankly was beginning to wear thin, is over and Oracle, or Ellison, has finally got his man (or company). But news of the deal will surely leave a sour taste in BEA chairman and CEO Alfred Chuang's mouth. Chuang co-founded the company in 1994 along with Bill Coleman and Ed Scott - the first initial of each founder's first name makes - you guessed it - has never disguised his hatred of Oracle and probably played a key role in the delay of the sale according to some analysts; he probably took Oracle's original bid as a personal insult. But even Chuang said yesterday that the deal was in the best interests of shareholders.
Personalities aside, Oracle now gets its hands on a world-class set of middleware technologies which makes it a more formidable competitor in this market, especially against the like of IBM, with its WebSphere stack, and of course its perennial nemesis SAP, which has always touted its NetWeaver platform as a key differentiator.
But several questions remain in the aftermath of this deal. First why did Oracle sweeten its offer - ie agree to pony up an additional $2,37 above its October offer? Many believe that it is all about acquiring an independent middleware with the added bonus of a vast and loyal installed customer - but 'loyal' perhaps not by choice, because complex middleware is not something you rip out and replace every two years or five for that matter. The move also shows that Oracle is committed to becoming a large-scale enterprise infrastructure vendor as well as a database and applications giant. Then again it could simply be that it (or Ellison's ego) just wants to rule the IT world.
Second, what does this acquisition say about Oracle's own Fusion strategy. Is it an admission that it was botched and is in trouble.
That might be true. But BEA also hands Oracle a lucrative base of customers that are not Oracle customers - yet. If Oracle can latch onto and retain these customers while at the same time absorb BEA and cutting costs there is a great upsell opportunity to other Oracle software products in the offing.
But perhaps more important is the challenge that Oracle now faces in reconciling two more or less identical middleware platforms - identical in the sense of what both are trying to achieve - in what is already a complex and increasingly messy stack. That could be a very time consuming not to mention expensive task.
So what next for the middleware market? All eyes will now fall on Tibco, which would be a relatively easy picking for say an HP or Microsoft since it 'only' has a market cap under $1,5bn.
But Oracle's swoop will now raise its price every minute. Indeed Tibco's stock rose 11% on the BEA takeover.
Source: Computergram


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