The Deal
Thursday, October 23, 
6:04 am

by David Shabelman
[Posted on January 16, 2008 - 5:25 PM]

Carl Icahn expressed satisfaction Wednesday with BEA Systems Inc.'s [BEAS] acceptance of an $8.5 billion acquisition by Oracle Corp. [ORCL] "I'm happy with the deal," said the activist investor, who owns 13% of BEA shares. "I was up at 4 a.m. in the morning a lot of mornings over the past few weeks. There was a lot of shuttle diplomacy."

Indeed, Icahn, who effectively provided cover for Oracle's hostile play by threatening a proxy fight against the target last fall, played an instrumental role in cementing a deal by persuading Oracle and BEA executives to return to the bargaining table after talks had ground to a halt.

BEA agreed to the $19.37 per share offer after rejecting a $17 per share package from Oracle last October, saying it was worth $21 a share. The offer represents a 24% premium to BEA's closing stock price on Tuesday price of $15.58. Excluding BEA's cash reserves, Oracle will pay $7.2 billion for the provider of middleware software.

"They met in the middle," said Patrick Walravens, an analyst with JMP Securities LLC. "Did Oracle get a great deal? No, but they paid pretty much what they paid for their last three acquisitions."

Oracle is paying roughly 6.8 times BEA's "enterprise value to maintenance basis," the annual cost of periodic software updates for customers and a key metric the buyer uses to value acquisitions. At that price, the deal is in line with Oracle's $3.3 billion acquisition last year of business intelligence company Hyperion Solutions Corp., which had a 6.8 EV/maintenance multiple, and its $6 billion purchase in 2006 of customer management software maker Siebel Systems Inc. (7.2 EV/maintenance). However, the price is less than the 8 times EV/maintenance that Redwood Shores, Calif.-based Oracle paid for PeopleSoft Inc. when it acquired the company in 2004 for $10.3 billion.
 
Unlike the PeopleSoft deal, however, which was struck at a time of comparative economic strength in the software business, deteriorating financial conditions helped push BEA to accept Oracle's bid, said Trip Chowdry, an analyst with Global Equities Research.

"I think the price could have gone past $21 a share, but since stock market conditions are so terrible and we're in a credit crunch, it caused BEA to be a little more flexible," he said. "If the credit crunch was not an issue, BEA would not have settled for anything less than $21."

Walravens said that mounting industry competition also spurred BEA into a deal. Oracle, IBM Corp. [IBM] of Armonk N.Y., and Microsoft Corp. [MSFT] of Redmond, Wash., are continuing to eat away at BEA's market share for middleware products, which are used to link database tools and business applications.

Yet a clinching factor in completing a deal was Icahn's involvement. The veteran financier pressed BEA to sell the company well before Oracle made its original offer, though he did want BEA to hold out for more than $17 a share. Icahn sued the middleware specialist in Delaware court after it rejected Oracle's initial offer, demanding the right for shareholders to vote on a sale and threatening a campaign to seize control of BEA's board of directors.
Oracle also had reason to ink a deal. The company had expressed interest in BEA as far back as 2003, when it began courting PeopleSoft. BEA is a natural fit for Oracle since its technology runs on top of Oracle's database software.
 
"Oracle tried to mask their eagerness, but they wanted BEA for a long time," Walravens said. "And they certainly wouldn't have wanted SAP [AG] or IBM to buy them."

The acquisition is expected to continue the ongoing pattern of consolidation in software. Shares of BEA rival Tibco Software Inc. [TIBX] rose 12% in late trading on expectations that an Oracle competitor would make a play for the Palo Alto, Calif.-based company. Trading at $7.54 a share, Tibco sports a market capitalization of $1.4 billion.

With the pursuit of BEA out of the way, Oracle could next turn its attention to supply-chain software maker i2 Technologies Inc. [ITWO] Under pressure from its own activist shareholders, Dallas-based i2 in November said its board of directors had formed a committee to evaluate strategic options, including a sale. That review is expected to be completed by Jan. 31.
 
Shares of i2 were up 2.6% at $12.48 on Wednesday, giving the company a market cap of $267.5 million.

"I would not be at all surprised if i2 and Oracle were talking," said Jamie Friedman, an analyst with Susquehanna Financial Group LLP. "The board at i2 is under enormous pressure to sell and Oracle has acquired 20 some-odd companies in two years, so you've got your two parties right there."


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