BEA Scoffs At Oracle's $6.7 Billion Takeover Bid - InformationWeek

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10/12/2007
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BEA Scoffs At Oracle's $6.7 Billion Takeover Bid

BEA's board of directors appears to think it can get a better offer if it negotiates or rejects Oracle's initial bid.

Oracle is bidding to take over BEA Systems, the No. 2 middleware supplier, for $6.7 billion. But BEA appears determined to resist at least Oracle's opening move. It's board of directors scoffed at the bid on Friday.

"BEA is worth substantially more to Oracle, to others and, importantly, to our shareholders than the price indicated in your letter," the board of directors responded to the Oct. 9 offer from Oracle.

BEA is being threatened with delisting by Nasdaq because it hasn't been able to report its quarterly earnings for several quarters, because of the need to restate its earnings for the past 10 years as a result of stock option backdating. That dearth of reporting "limits investor visibility into our performance. We expect that this will be corrected in the near future," the board responded.

Current financial information will have the effect of increasing BEA's value in the marketplace, the response indicated.

From the onset, Oracle's move has some of the earmarks of a hostile takeover, like Oracle's ultimately successful but protracted bid to take over PeopleSoft.

The BEA board took a belligerent stance toward Oracle's expectation that BEA would "proceed ... to a process" of accepting the bid. "We are very sensitive to the fact that Oracle is a direct competitor. 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," it said.

BEA's resistance may offer an opening for Oracle's German applications rival, SAP, to intervene. SAP has engaged in bidding wars with Oracle for acquisition targets in the past, although its own recent purchase of Business Objects for $6.8 billion might tie its hands.

"It's feasible that SAP could become involved," Forrester Research analyst Michael Gilpin said in an interview. "SAP has already been bested by Oracle in the platform business," where an applications vendor builds out supporting database and middleware based on some neutral standard. Oracle's is Java. SAP's is NetWeaver, which can address either Java or its proprietary ABAP language R/3 applications. But NetWeaver isn't becoming established middleware as fast as Oracle's Java-based Fusion, said Gilpin.

"We don't think SAP ever quite got the DNA to be in the platform business, especially after Shai Agassi," he added, referring to SAP's former top development strategist who left April 1. Buying BEA would give SAP a second chance to expand its Java platform capabilities and integrate the NetWeaver-based applications with BEA products.

"I believe that architecture could be integrated with the BEA platform," Gilpin noted, but said it would be unlikely SAP would try to make older ABAP language applications run under WebLogic or BEA's other Java middleware. "It would be hard. The amount of money it would take would be ridiculous," he said.

BEA Systems is the No. 2 market-share holder, according to market-research firm IDC, with IBM No. 1 and Oracle No. 3. BEA has a leading set of Java middleware products built around its WebLogic Java application server.

If SAP acquired BEA, it would both frustrate Oracle's ambition to own a larger share of the Java middleware market and give SAP a platform with which to match Oracle's Java-based products. SAP has been struggling to win marketplace acceptance of NetWeaver, an SAP-technology-based alternative to Java middleware.

Oracle's offer is 25% above the market value of BEA Systems based on its closing share price Thursday of $13.62. Oracle is offering $17 a share.

The offer comes at a sensitive time for BEA. Billionaire investor Carl Icahn has picked up a 13.22% stake in BEA, while calling for its sale to a strategic acquirer. Oracle, with its combined database, applications, and middleware product lines, would be such an acquirer.

"This proposal is the culmination of repeated conversations with BEA's management over the last several years," said Oracle president Charles Phillips in an announcement of the bid early Friday.

Oracle had delivered a letter to the BEA board of directors making the offer four days earlier. The company's directors appear to think the bid can be improved through negotiation or outright resistance.

Oracle's letter stated: "We believe our all-cash offer provides the best value for BEA's shareholders. We look forward to completing a friendly transaction as soon as possible."

The acquisition bid won endorsement from the brokerage firm Friedman, Billings, Ramsey & Co. "The purchase of BEA would eliminate a major competitor, give Oracle a dominant position in the market, and further strengthen Oracle's position as providing the broadest enterprise software stack in the market," it said in a report to stockholders Friday following the public announcement of the bid. At the same time, it said the bid offered a higher premium than Oracle preferred to pay, but it may have to go higher.

"We fully expect BEA's board to demand a higher price when it come to the negotiating table. Oracle has a history of making several bids ... and we do not think Oracle would make a 'best and final offer' as its first offer," the FBR report said.

Other bidders may get involved, it noted, without naming any candidates. Oracle may end up paying $18, $19, or even $20 a share to get BEA, it said.

Anne Thomas Manes, analyst at the Burton Group, said one potential rival bidder, in addition to SAP, is IBM. It is the leading middleware vendor as long as BEA is in the market. "IBM is nervous. After a BEA acquisition, Oracle will be as big as it is."

Manes said BEA's technology would integrate easily with Oracle's Fusion middleware and applications. If if succeeds in the acqusition, Oracle "could walk into all these organizations and say, 'We've got the best platform available,' " she said.

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