BEA or Ellison: Who Will Prevail?

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New Bookings on the Decline

Although it could boost its offer slightly, Oracle believes even $18 a share is too dear for BEA, which has seen new sales of its middleware decline in 2007, says the person close to the talks. "As the price goes up, you have to take out more costs [from BEA's operations] to make it work," says this person. "At a certain point, you're literally dragging [employees'] kids out of child care."

That said, Ellison has a well-known competitive streak, and with the BEA bid he's gunning for the top spot in the market for middleware. IBM (IBM) has been the leader in that market, pulling in about 30% of the $9.6 billion spent globally on middleware during 2006, according to market researcher Gartner (IT). Buying BEA would vault Oracle to the No. 2 spot, giving it roughly a 20% share of the market.

New bookings of BEA's software declined 11% during the first half of its fiscal year, which began Feb. 1. Of BEA's $1.4 billion in revenue during the prior fiscal year, about half came from recurring maintenance fees, which customers pay to receive technical support on products. That's the piece Oracle wants most.

A Growing Chorus

Heather Bellini, a UBS (UBS) analyst, said in an Oct. 26 note to clients that at $21 per share for BEA, Oracle would be overpaying for maintenance revenues relative to its buyouts of Hyperion Solutions, Siebel Systems, and PeopleSoft. In an Oct. 29 update, she said Oracle could return with another bid and suggested BEA's shares might rise as high as $18.50 if another bidder emerges.

But Jason Maynard, a Credit Suisse Group (CS) analyst, said in his Oct. 29 research note that he "doubt[s] another bidder is going to step forward with a materially better offer." Oracle's chief competitor, SAP (SAP), has already taken itself out of the running (BusinessWeek.com, 10/19/07). Maynard added that Oracle's $17 per share offer is "more than reasonable, and certainly worth the time and effort of BEA's management to begin earnest negotiations."

With pressure building from all sides, BEA may have little choice but to comply.

Ricadela is a writer for BusinessWeek.com in Silicon Valley .