Online Extra: Oracle: In a Takeover Trap?
By Alex Salkever
You can say one thing about Larry Ellison. He knows how to get attention. On June 6, the visible, voluble CEO of business software giant Oracle (ORCL ) unveiled a hostile $5.1 billion takeover bid for rival PeopleSoft (PSFT ). The all-cash offer came a mere four days after PeopleSoft had announced it would merge with another business-software provider, JD Edwards (JDEC ), in a $1.8 billion stock transaction. Oracle's takeover effort is hardly friendly. PeopleSoft has threatened to sue in order to stop it, and its board rejected the offer on June 11. Ellison has mocked assertions that he has made a lowball offer, even though Oracle's $16 per share tender is now below the PeopleSoft's roughly $17 price.
Whether Ellison has a genuine interest in consummating the deal remains a matter of debate. Many analysts think it's a strategic move to disrupt PeopleSoft's planned acquisition of JD Edwards. Oracle's offer comes at the end of the quarter -- precisely when PeopleSoft sales reps are pushing hard to close deals. Not only are they struggling to sell pricey software into a stagnant market but now they're also answering questions about what will happen if Oracle buys PeopleSoft. Will Oracle shut down PeopleSoft product lines in financial services and human resources? Imagine being a salesperson in that environment.
A more pertinent issue for Oracle investors, however, is what the proposed deal means for the stock. So far, not much. Oracle shares have moved up only 2.4% over the past four weeks, according to Thomson Financial First Call. News of the deal dropped share values slightly from the $13.50 range, to around $13.
With Oracle up almost 80% over the past year, however, smart investors will keep a cautious eye on the impact of the takeover move -- perhaps from the sidelines for now. "Hostile bids like this get drawn out and become very acrimonious. It doesn't work out for anybody involved," says Jonathan Rudy, software analyst at Standard & Poors. (Neither Rudy nor S&P hold Oracle shares.)
Oracle's continuing strength has again vaunted it among the ranks of BusinessWeek's Info Tech 100 list, clocking in at 12 this year. But Oracle may have a problem. Its revenues from new customers have been declining steadily as big companies continue to postpone major purchases in software and databases -- Oracle's bread and butter. Last quarter, revenues from new software licenses -- a leading indicator of customer growth -- declined 4% year-over-year.
True, total sales were up 2%, and earnings rose 9% as Oracle managed to earn more from selling services to existing customers and to contain costs effectively. Still, the decline in new license revenues is down from a slow quarter the year before. In 2002, Oracle posted earnings of 39 cents per share on revenues of $9.7 billion. That's well down from 2001, when it delivered earnings of 44 cents per share on revenues of $10.9 billion.
The database software market has remained stagnant, and in the enterprise software market Oracle has been losing ground to its biggest rival, SAP (SAP ), itself No. 40 on BusinessWeek's new Info Tech 100 list. That's discouraging because Ellison has struggled to build that business in hopes of diversifying from databases and selling customers multiple pieces of software. Of course, the rest of the software industry is in similar straits. But Ellison can be an impatient CEO, and waiting for an elusive cyclical turn probably doesn't suit him.
News reports say Ellison and PeopleSoft CEO Craig Conway have chatted in the past about doing a deal, but a hostile takeover bid is hardly the way to win friends and influence people. Actually, it could most help the company that Oracle should be most worried about -- rival SAP. By raising doubts about PeopleSoft's future, Ellison may hope to chase customers away from the prey and toward the hunter. But Oracle may wind up pushing those customers into SAP's arms.
Indeed, Oracle probably has more to fear from SAP than from the merged PeopleSoft/JD Edwards. Should SAP continue to make big gains in the high-end enterprise software sector, where it claims controls of 54% of the global market, the German concern will end up with clear dominance. SAP clearly understands this dynamic: It launched a global marketing campaign targeted at PeopleSoft customers on June 10 (see BW Online, 6/12/03, "Why SAP Is Sitting Pretty").
To even contemplate Oracle's deal, PeopleSoft's board will certainly require more than the $16-per-share offer. The magic number could be as high as $20, although Ellison hasn't said if he would up the offer. Oracle is in a quiet period before reporting earnings on June 18 and declined to comment for this story.
A raised bid to $20 per share wouldn't be as steep as it sounds, however. PeopleSoft has $2 billion in cash on its books, so Oracle's bid would effectively be around $3 billion. Should Oracle secure corporate financing for the deal at today's low, low interest rates, it might be able to turn the acquisition into a higher return on capital than its own balance-sheet cash -- especially if PeopleSoft's business picks up and the deal does add up to more than the two discrete parts. And if Oracle could migrate the PeopleSoft users to its own business applications, then Ellison could finally start to see significant revenues.
Sounds good, but this strategy has lots of risks. For starters, hostile takeovers are hardly the best way to build goodwill with the customers Oracle will need to retain after consummating the deal. Should they leave -- for whatever reason -- Oracle shareholders will be left holding the bag.
Further, on a pure valuation basis, some analysts have questions. "I have a hard time seeing how a company 20% the size of Oracle would add $3 billion in incremental profits in any reasonable amount of time. It doesn't pass the sniff test," says Peter Cohan, a business strategist and publisher of the Cohan Letter. (He holds no shares in Oracle and does no work for the company.)
Cohan is a tech bear these days. But even bullish analysts who don't see the valuation as excessive, such as S&P's Rudy, have downgraded Oracle stock on the uncertainties created by its swashbuckling approach. In corporate proxy wars, rarely does anyone make a lot of money. So investors might want to be cautious before considering Oracle as a place to seek growth.
Salkever is Technology editor for BusinessWeek Online