Bagging BEA Systems Won't Be Easy

Oracle says it's willing to pay $17 a share, but Wall Street is betting that the bidding will go higher

by Rachael King

Oracle (ORCL) has every reason to go after BEA Systems (BEAS), judging from the reaction on Wall Street to news that Oracle Chief Executive Larry Ellison wants to spend $6.7 billion for the smaller software maker.

BEA brings valuable assets, including a huge customer base, a large revenue stream, and a reliable set of products centered on middleware, the software that helps glue together disparate programs. The deal would round out Ellison's buying spree of more than 30 companies for about $25 billion in recent years, bringing Oracle into virtually every niche of software aimed at business customers (BusinessWeek, 9/21/07).

Shares of BEA Systems surged 38%, to $18.82, after Oracle's advances were made public. "Oracle can integrate the BEA technology directly into the core of the Oracle stack, strengthening it, while at the same time removing a competitor and adding close to $1.4 billion in annual revenue to its coffers," writes Technology Business Research analyst Stuart Williams. "BEA is a technology-focused firm that should find a good home inside Oracle."

But at what price? Oracle says it's willing to pay $17 a share in cash. It's probably going to have to fork over more than that. As much as BEA Systems needs a buyer, company executives and its biggest shareholder, Carl Icahn, balked at Oracle's bid. What's more, BEA Systems has strong defenses against an unwelcome offer, and there's no telling whether a rival suitor will join the fray.

Getting Its Finances In Order

Analysts say the price could rise to as high as $20 a share. "BEA is doing a little gamesmanship here," says David Hilal, senior managing director of equity research at Friedman, Billings, Ramsey & Co.. "They know that Oracle's first offer is probably not their best and final offer." In the past, Oracle has been known to make several offers before consummating a deal. "While I think $17 is very fair, Oracle probably made that offer knowing they've got a little more leeway," says Hilal. BEA may try to extract an additional $1 to $3 a share, he says.

While BEA Systems didn't spurn the overture outright, it said Oracle is trying to buy it on the cheap. "BEA is worth substantially more to Oracle, to others and importantly, to our shareholders than the price indicated in your letter," William Klein, BEA's vice-president of business planning and development, wrote in a letter to Oracle President Charles Phillips . Klein indicated that the absence of current financial information had given investors an incomplete view of the company's performance. Because of an options backdating scandal, BEA has been working to restate its finances. NASDAQ has given BEA until Nov. 14 to file all delinquent quarterly and annual reports dating to the quarter ended July, 2006.

Icahn, who owns about 13.22% of BEA Systems shares, told The Wall Street Journal he's "certainly happy" about Oracle's bid and said BEA "definitely should be taken over." He also said he "would like to see it command a better price." There's also the matter of formidable takeover defenses that include a poison pill which would make a hostile acquisition prohibitively expensive.