Maneuvers in Tech May Spur Merger
June 10, 2003
Maneuvers in Tech May Spur Merger
As Oracle launches its PeopleSoft takeover bid, experts see long-awaited era of consolidation.
By Joseph Menn and Alex Pham, Times Staff Writers
Oracle Corp. Chief Executive Larry Ellison and PeopleSoft Inc. CEO Craig Conway are engaged in a frenzy of name-calling and tactical maneuvering over Oracle's hostile bid for PeopleSoft.
But their actions show that they fundamentally agree on one thing: The software industry is finally entering a long-expected era of consolidation.
As promised, database software firm Oracle on Monday filed its formal $5.1-billion tender offer for shares of PeopleSoft. That move was prompted by PeopleSoft's agreement last week to buy rival business-software maker J.D. Edwards & Co. for $1.5 billion in stock.
Few analysts expect Oracle's offer, which amounts to $16 a share, to win the support of more than 50% of the shares by the initial July 7 deadline — especially since PeopleSoft shares rose 8 cents to $17.90 in Nasdaq trading Monday. Oracle shares fell 23 cents to $12.86, also on Nasdaq.
Experts generally praised Ellison's surprise move as a shrewd one that will benefit Oracle, win or lose, and launch a rapid escalation of deal-making in the software world.
"This is the first week of what will be a decade of consolidation in the applications space," said Banc of America Securities analyst Robert Austrian. "The large suite vendors are going to get larger and stronger, and everyone else is going to get weaker. If stand-alone firms are attractive, they'll be swallowed."
If the bid is accepted, Oracle will surpass Microsoft Corp. in the market for business-application software. If rejected, Oracle may succeed in sowing doubt among PeopleSoft's customers, since Ellison pledged to stop selling PeopleSoft's human resources management programs.
Because Oracle's bid represented only a 6% premium to PeopleSoft's stock price when the offer was revealed on Friday, some analysts suggest Ellison wouldn't mind rejection. "I think they're serious about it, but they win either way," said analyst Brendan Barnicle of Pacific Crest Securities.
Hostile takeovers are extremely rare in the software industry, since the target firm's key assets usually are employees, who can simply walk away. But some investment bankers have been expecting a surge in friendly mergers for years. The collapse of the market for initial public offerings made money much harder to come by, and many predicted that struggling companies would be swallowed up by stronger rivals.
Instead, after the tech sector crashed in 2000, even the strong companies focused on surviving, not on buying their straggling brethren. And smaller companies that were in good shape became reluctant to sell, believing they couldn't fetch a fair price during a downturn, said Ken Marlin of Marlin & Associates, a technology and media investment bank in New York.
All that began to change around the start of the year; since then, the technology-heavy Nasdaq index climbed 20%. It lost 23.45 points on Monday to close at 1,603.97.
"People are beginning to think that the worst is behind us," Marlin said.
Several say the resurgence actually began in December, when IBM Corp. announced it would buy Rational Software Corp. for $2.1 billion, three times Rational's annual revenue of $690 million.
"We hadn't seen that kind of valuation in quite some time," Marlin said. "And IBM is considered a very conservative company that doesn't go on big spending sprees. A lot of people saw that deal as IBM's signal that the market had hit bottom and was on its way up."
The last few months have brought Yahoo Inc.'s $235-million purchase of Web search firm Inktomi Corp.; USA Interactive's $734-million purchase of Web-based loan service LendingTree Inc.; and hand-held computer pioneer Palm Inc.'s plan last week to acquire rival Handspring Inc. for $192 million in stock.
Few are expecting many mega-deals on the scale of Hewlett-Packard Co.'s purchase of Compaq Computer Corp. last year.
"Those kinds of mergers are few and far between," said Tim Bajarin, president of Creative Strategies, a technology consulting firm in Campbell, Calif. "What you're seeing instead are the bigger guys selectively acquiring technologies to fill out their portfolio to help them become more competitive."
Several factors are at work. Since potential acquirers are finding their internal growth has slowed, they are looking elsewhere to boost revenue. Share prices that are low — but may soon be headed up — are providing tempting targets.
"This is a great time to buy," said Russ DeVol, director of regional studies at the Milken Institute in Santa Monica. "There's a feeling that if you don't buy soon, the stock price is more than likely going to go up."
Big companies that buy the most software are providing an impetus as well, analyst Austrian said. Many corporations have trouble integrating programs from various vendors; if the sellers combine, that work would be obviated. Big customers are also reluctant to spend on major, untested batches of software from firms with short track records. They would greatly prefer their existing suppliers to offer enhanced features instead.
So if Ellison's intervention spoils PeopleSoft's plan to buy J.D. Edwards, Oracle might snap up J.D. Edwards. If Oracle doesn't pick up PeopleSoft, No. 1 business applications maker SAP might make a play for it.
Oracle faces some potential obstacles to a tender offer for PeopleSoft, including a "poison-pill" defense that would make a hostile takeover unworkable and objections from antitrust authorities, said Charles Biggio, a former Justice Department official now with law firm Akin Gump Strauss Hauer & Feld. In comments to analysts Friday, Ellison made no bones about his intention to phase out PeopleSoft's products and migrate the company's 4,400 customers to Oracle products.
"That's likely to be a red flag for antitrust enforcers," Biggio said.
Ellison said he also has looked at other targets, including customer-service software maker Siebel Systems Inc. That could mean musical chairs for several more companies.
"Companies such as Microsoft, SAP and Oracle are in the driver's seat," Austrian wrote to clients. "We expect big rates and degrees of sector reshuffling."