QotD: Sell Side Analysts

On the Oracle acquisition of BEA today:

"Half of these sell-side analysts wouldn’t touch BEA with a 10-foot pole yesterday at $13.60, now they’re stumbling and bumbling all over themselves to put out research notes explaining why $17 just isn’t enough for the BEA assets."

- anonymous

Some Thoughts on Oracle and BEA

Cue theme music. Roll.

Today the sun rose to news that Oracle has announced their intention to acquire BEA, a company that has seen the sun set on it’s glory days. In recent months Carl Icahn, not exactly a buy and hold kind of guy, has acquired a 13.2% position in the company, and existing investor Steve Cohen of SAC Capital had become more activist in his position. Between Cohen and Icahn were a combined shareholdings of about 21%, certainly enough to influence move to a sale, or threaten any intention to remain independent.

Further complicating matters for the company was the fact that in an amended 8-K filing just this week they announced their backdating problems were larger than previously disclosed. BEA was in a corner and it was pure fantasy for anyone to think they could remain independent.

First let me address the valuation of this deal, as currently proposed. At $6.7b the deal values BEA at 7x their trailing maintenance revenues, which is exactly in the sweet spot for practically every other deal they have done involving publicly traded companies. At a 25% premium over yesterday’s trade, many analysts are surprised by the richness of the offer, but it really just reflects that fact that BEA has been undervalued by the public markets on the basis of maintenance revenue alone.

Will IBM, HP, or SAP step in? SAP definitely not, they have their hands full with BOBJ and the idea that they would acquire BEA to integrate the middleware and platform technologies just goes against everything I know about that company. HP is an interesting potential acquirer but acquiring someone just because you can really isn’t a good enough reason and beyond that it is hard to imagine what HP would gain given the competitors they would instantly create out of their partners.

IBM is the most logical white knight but that company doesn’t have a track record for entering bidding wars over companies so it’s more likely they will stay on the sidelines. Besides, while the upsell would be good for investors it is hard to imagine a scenario where BEA comes out ahead by being buried inside Big Blue.

They just announced that Fusion apps will be delayed into 2009, this deprives them of a significant vehicle for pushing Fusion platform upgrade cycles (especially when coupled with the extended support agreements they were forced to make available in order to counter SAP’s claims that they were going to use maintenance to force upgrades). Maybe BEA is a wedge that helps them secure their base against competitors, given that the only rumored acquirer beyond Oracle was IBM.

Here’s a couple of ways of looking at this deal.

Oracle just announced a significant delay in Fusion Apps to 2009, and this coming just a month before their annual shindig in SF, OpenWorld. This is not news that would be met with enthusiasm in the company. Wookey was always on the hook for integrating a bunch of acquired products and continuing internal development in a what many have called a futile strategy.

John Matelski, Chairman of the International Oracle User Council wrote an op-ed that is posted on Oracle’s own website, in it he says:

Oracle’s dual commitment to Oracle Applications Unlimited and Oracle Fusion has always given fodder to the grassy-knoll folks. They point to the existence of both as proof of a lack of commitment to either, theorizing that trying to fund both initiatives will inevitably lead to a dilution of resources and, ultimately, a delay of Oracle Fusion or nominal support of Applications Unlimited.

This statement has turned out to be prophetic because a predicted delay in Fusion as a result of multiple initiatives, some aimed at stemming customer defections, is exactly what is happening. Matelski goes on to suggest that there’s nothing to see here and Oracle’s customer base will be well intact when Fusion eventually arrives, but given the hard fact that SAP has taken well over $200 million in license revenue from Oracle’s acquired customer base, through the Safe Passage program alone in recent years, it is disingenuous to suggest that Oracle’s leadership is not well aware of the risk that grows the longer Fusion drags on.

SAP’s own competitive strategy against Oracle centered on creating FUD around this topic and it worked. While common to equate FUD as some kind of dirty trick, the fact remains that SAP was successful with this because Oracle’s own customers did not buy the messaging that the company put out, first suggesting they would rewrite everything then later admitting they couldn’t, ending up committing to supporting acquired products as standalone entities. The Fusion Apps strategy has always been confusing to me and I like to think that I understand a few things about this industry, it’s no surprise they couldn’t sell it or much more importantly, deliver on it.

History shows that whenever Oracle has bad news coming they divert attention through some action is fundamentally more interesting to the broader market. It’s like billion dollar three card monty and I actually admire their capacity to pull it off, really. This isn’t an indictment of their business strategy either because I do think the M&A strategy has been executed really well, and more to the point, it was the right strategy for the company.

Having said that, there has been very little consensus analysis of Oracle’s core business or the success in acquiring revenue growth as a result of the M&A deals because their business is constantly changing. How can you really do a year-over-year analysis benchmarked against a competitive peer group when the year-over-year componentry is radically different?

BEA does have some really interesting products in addition to a stellar customer base. The AquaLogic suite of products is cutting edge stuff, seriously impressive capabilities. The maintenance base value kicks in with both Weblogic and Tuxedo; their customer bases are simply put, enormous. Assuming the deal goes through, Oracle gets a significant maintenance revenue stream to pay for the deal, while acquiring the substantial AquaLogic parts and, more importantly, the teams behind them.

The talent part is interesting to consider, especially in light of the rumored discord among the leadership of Oracle’s dev groups. Kurian and Wookey have been jockeying for power and it appears that Kurian definitely has the upper hand now. Will BEA bring about an infusion of product development leadership as a consequence of this deal? Possibly, and that can be a nice extra in this deal.

Lastly, to those that will suggest there is nothing in this for customers, well let me just acknowledge that this isn’t about customers, it’s about the self interests of shareholders.

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