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10/26/2007
03:49 PM
Rajan Chandras
Rajan Chandras
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Bye Bye, BEA: Why Oracle Needs This Deal

After rejecting Oracle's initial bid for $6.7 billion, BEA has now indicated readiness to sell itself to Oracle ("or any other bidder") for about $8.2 billion. With Oracle's insatiable appetite, BEA's relative stagnation, and incessant pressure from billionaire investor Karl Icahn on BEA management, the acquisition now seems a sure thing. So, what does Oracle get for $8 billion and change? A cake that it has always coveted with an icing to die for.

After rejecting Oracle's initial bid for $6.7 billion, BEA has now indicated readiness to sell itself to Oracle ("or any other bidder") for about $8.2 billion. With Oracle's insatiable appetite, BEA's relative stagnation, and incessant pressure from billionaire investor Karl Icahn on BEA management, the acquisition now seems to be only a matter of time. So, what does Oracle get for $8 billion and change? A cake that it has always coveted…and an icing to die for.

Oracle has always been a leader in terms sheer market size and growth, but the same can hardly be said in terms of its technological prowess. The fact is, Oracle has always lagged behind its acquisitions - be it Siebel (CRM), PeopleSoft (HRM, Hyperion (BI) - or now BEA (application middleware). On the other hand, BEA has always led the market in terms of technology. Consider, for example, its main product lines around the application server (Webogic), integration services (AquaLogic) and transaction processing (Tuxedo).Oracle is simply repeating what it does best: use its market-leading clout to acquire market-leading technology.

But the real icing on this cake is BEA's virtualization technology. Given the dazzling future of virtualization - quite possibly the Technology of the Decade - the WebLogic Server Virtual Edition (WLS-VE) and LiquidVM (which provide Java applications with a virtual environment that does not need an operating system at all) are, from Oracle's perspective, technologies to die for.

And cheap, too. Consider…

…Citrix purchased XenSource for $500 million and expects it to generate sales of only $50 million (yes, a mere twentieth of a billion) in 2008. That's $10 for each $1 in sales. In comparison, Oracle gets BEA for less than $7 per sales dollar.

…VMWare has a market capitalization of about $44 billion and rising (yes, that's billion, for a company that went public last month!) for sales of about $ 1 billion, which computes to a market cap of $44 per dollar in sales. In comparison, BEA has a market cap of less than $6 per dollar in sales. Granted, virtualization accounts for only a tiny fraction of BEA's sales, but that is still a solid upside. What's to prevent BEA from acquiring another $20 or 30 billion in market cap purely on account of its virtualization capabilities?

And as if this weren't enough, there is a cherry on top of the icing: the opportunity to sock it to Microsoft with technology that does not need operating systems on the server.

Oracle may raise a bit of ruckus over the price, but that's just business. This is arguably as solid an acquisition as any that Oracle has ever made, and the only surprise would be if Oracle management foolishly fails to realize this. And as all well know, Oracle management is anything but foolish.

Rajan Chandras is a consultant with a global IT consulting, systems integration and outsourcing firm, and can be reached at rchandras@gmail.com.After rejecting Oracle's initial bid for $6.7 billion, BEA has now indicated readiness to sell itself to Oracle ("or any other bidder") for about $8.2 billion. With Oracle's insatiable appetite, BEA's relative stagnation, and incessant pressure from billionaire investor Karl Icahn on BEA management, the acquisition now seems a sure thing. So, what does Oracle get for $8 billion and change? A cake that it has always coveted with an icing to die for.

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