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12/31/2003
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Speculation Continues On BEA Systems Takeover

The latest report, from Yankee Group, sees Microsoft as a logical suitor

BEA Systems, the company cited in business-school curriculums as the fastest to ever reach $1 billion in revenue, is again the target of acquisition speculation.

Since it was founded in 1995 in a tiny office in rundown East Palo Alto, Calif., BEA Systems has put together a streak of insightful moves. It transformed itself from the vendor of an aging Tuxedo transaction-processing system into an application server vendor in 1998 and a middleware platform player in 2002-03, adding portal, integration and development software. Its stock, now trading around $12.50 a share, rose to a high of $90 in 2000. Company officials, believing better times are on the way, say they hope to restore some of that value.

In the meantime, BEA is persistently the subject of takeover rumors, due to its rich assortment of more than 12,000 customers. In mid-2002, rumors of its takeover by Hewlett-Packard were posted to the O'Reilly Network (www.oreillynet.com). On Dec.15, research from Banc of America Securities predicted BEA Systems stock would rise from $12 to $13.50 in 2004 because of its attractiveness as a takeover target. Its appeal is its large base of enterprise customers, the report said, naming Oracle as a possible buyer if it proves unable to acquire PeopleSoft.

The latest industry observer to speculate is Yankee Group analyst Dana Gardner, who thinks the most logical buyer is Microsoft. He says both Microsoft and BEA Systems have weaknesses as software companies that could be countered if Microsoft acquired BEA.

In a research note issued Dec. 30, Gardner wrote that the combined companies would gain "powerful synergies, give the marketplace more choices for IT software and blunt the competitive threat facing Microsoft," primarily from IBM, Sun Microsystems and Hewlett-Packard.

Gardner wrote that Microsoft needs to stop trying to convince the world that it must become Windows-only. It can reach out to the world of Java developers and other systems by acquiring BEA Systems' WebLogic Application Server, Workshop development tools and portal and integration software.

BEA, in turn, "has developed a winning--but no longer market-dominant--integrated technology platform. The company's ability to generate revenue growth and consistent profits from its enterprise accounts is suspect," he wrote. BEA's current market valuation is less than $5 billion, or about "what Microsoft generates annually in cash reserves," and its stock "languished in 2003," he added.

Microsoft's stock, on the other hand, has "underperformed in 2003 at a level the company rarely has seen, remaining virtually flat," as other technology companies regained some of their lost strength, he wrote. Both Microsoft and BEA are going to have trouble making enterprise account revenue increases in 2004 that would change the expectations built into their current stock valuations, he continued.

By acquiring BEA, Microsoft would combine its .Net strength in development tools with BEA's strength in its Workshop Java development environment. "For the foreseeable future, the IT world will remain solidly behind both Java 2 Enterprise Edition and .Net. Microsoft would do well to recognize this and embrace J2EE as a viable and necessary yin to Windows' yang," he wrote.

By offering a software stack that could move up the enterprise food chain without a Windows-only lock-in, Microsoft would pose an enticing choice to IT managers trying to cut costs. With Microsoft the typically low-price leader in the market, "CIOs would be wise to choose BEA on Windows over a Linux, enterprise Java and open source components mix," Gardner's research note said. Such a mix could add to the data center's complexity compared to a BEA application server and tools working smoothly with Microsoft's Windows and tools.

Microsoft has a $50 billion war chest with which to execute such a move, and without it, "there is a real risk of stagnation and a diminishing role for Microsoft's influence over the direction of independent software vendors, hosting organizations, enterprise architects ," and governments seeking to avoid vendor lock-in, Gardner wrote.

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