The Deal
Sunday, October 26, 
2:54 am

by Cheryl Meyer
[Posted on October 12, 2007 - 5:41 PM]

BEA Systems Inc. on Friday, Oct. 12 rebuffed a $6.6 billion unsolicited cash offer from Oracle Corp., saying the bid undervalues the middleware provider.

In a letter Thursday to Oracle president Charles Phillips, BEA said it is worth "substantially more" than Oracle's $17-per-share cash offer. The company has not been able to file full financial statements recently, giving investors "limited visibility" into the company's true performance, wrote William Klein, BEA's vice president of corporate development and business planning.

The letter was sent hours after Oracle announced it had delivered the offer to BEA. The bid represents a 25% premium over yesterday's closing price of $13.62. On Friday, shares of BEA soared more than 37%, up $5.10 to $18.72.

Oracle and BEA declined to comment further on the offer.

In its rejection letter, however, BEA fell short of slamming the door on a deal. It requested more information from Oracle about how it planned to proceed.

"We are very sensitive to the fact that Oracle is a direct competitor of BEA," Klein wrote. "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."

"This proposal is the culmination of repeated conversations with BEA's management over the last several years," Phillips wrote in Oracle's offer letter. "We look forward to completing a friendly transaction as soon as possible."

But "friendly" may be wishful thinking. Billionaire investor Carl Icahn, who owns about a 13.2% stake in BEA, has been pressing for a sale of the company for weeks; BEA has responded that such a decision rests ultimately with the company's shareholders. Icahn was reportedly pleased with Oracle's bid on Friday, but told the Wall Street Journal that BEA should command a higher price.

Speculation about an Oracle-BEA merger has circulated for years, and it escalated this week when one of Oracle's rivals, SAP AG, bid $6.8 billion for France's Business Objects SA. The next day -- Oct. 9 -- Oracle delivered its letter to BEA.

BEA sells application server software and so-called middleware, which is used by software developers to establish systems on which other software applications operate. Its products are used in transaction processing, billing, customer service, provisioning, and securities trading.

Oracle, which competes with BEA in the middleware market, stands to gain handsomely should it succeed with the acquisition. The Redwood Shores, Calif.-based software giant would get a large recurring revenue stream, a significant installed base into which the company could cross-sell its own products and it would eliminate a major competitor, said Friedman, Billings, Ramsey & Co. Inc. analyst David Hilal. In a report Friday, the analyst said he expects Oracle will eventually acquire BEA for between $18 per share to $20 per share, which is in line with other analysts' predictions.

If successful, the deal would make Oracle the number-two player in the middleware market, with a 20% worldwide market share, behind IBM Corp., which holds a 30% share, according to Citigroup Global Markets analyst Brent Thill. Oracle and BEA are currently tied for the second place spot with 10% to 12% global market share, but Oracle has been a player in the middleware market for only 5 years, while BEA is a veteran with 12 years experience.

"BEA has a more premiere offering that powers core systems of leading telcos and financial services -- both very important verticals to Oracle," Thill added.

"Oracle really needs their product to truly say they're a heterogeneous middleware player," said Fort Pitt Capital Group's Kim Caughey, referring to the fact that BEA's products, unlike Oracle's, work smoothly with a variety of database brands. "I think it would be a great deal for both of them. BEAÕs stock has been languishing for years."

An Oracle-BEA marriage is hardly a done deal, though. Other suitors could come calling, including IBM, Hewlett-Packard Co., Sun Microsystems Inc., EMC Corp., Software AG and even, according to at least one analyst, Cisco Systems Inc. Walldorf, Germany-based SAP might have been a possible buyer, but earlier last week unveiled its own major deal for Business Objects.

Oracle finally decided to make a run at BEA for several strategic reasons, said Forrester Research analyst John Rymer. The offer came during the last month of BEA's quarter, so it will likely freeze any incoming BEA business; SAP, a possible rival suitor for BEA, is distracted with the Business Objects deal; and Icahn has been publicly pressuring BEA to sell.

"You've got the stars in alignment here," Rymer said. He expects Oracle to continue to pursue the deal and BEA to eventually agree to an acquisition.

It is unlikely that Oracle's patience for a long-drawn out takeover will run out. It held out 18 months, through multiple offers and court battles, before it acquired applications software provider PeopleSoft Inc. in 2005. It is also accustomed to bidding wars, as witnessed when it snagged retail software provider Retek Inc. from SAP in March 2005 for $643 million.

Oracle has acquired more than 30 companies in the past three years. Most recently, on Sept. 6 it acquired Bridgestream Inc., a provider of enterprise role management software; on Sept. 5 Netsure Telecom Ltd., an Irish provider of network intelligence software; and on July 20, Bharosa Inc., a developer of theft and fraud protection software. Terms of those deals were undisclosed. In May it acquired Agile Software Corp., a maker of lifecycle management technology, for $495 million, and it closed its purchase of business intelligence software provider Hyperion Solutions Corp. in April, for $3.3 billion.

Goldman, Sachs & Co. advised BEA on the offer, and attorneys Daniel Neff, Andrew Brownstein, Joseph Larson and Paul Vizcarrondo Jr., of Wachtell, Lipton, Rosen & Katz, provided legal counsel to the San Jose, Calif.-based company.




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