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Web of Finance
727 hits
| Feb 14, 2004 3:18 am |
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Oracle4 PeopleSoft |
Melanie Hollands
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I still think this deal has a snowflake's chance in hell of getting done.
Ellison is certainly determined not to give up on acquiring PeopleSoft. But not at $26 per share, since PeopleSoft rejected the new bid earlier this week. The point of raising the bid, in my opinion, was to offset the negative of an obviously ridiculous bid that was on the table. Oracle is trying to get institutions to vote for its slate of directors. Candidly, if I were a PM at Fidelity I would laugh in Oracle's face if management tried to get my proxy with a below-market bid on the table. That's all this really meant, I think.
That said, perhaps there is an even higher price at which PeopleSoft might sell to Oracle. Craig Conway, PeopleSoft’s chairman and CEO, has made his point and might potentially give in if the price is right. His golden parachute, coupled with the moving up of the shareholders meeting, just gives me the feeling that something could be going on. Or maybe this is just more tactics in defense ... hard to say.
I thought this deal highly unlikely to succeed since the day the deal was announced in early June 2003, and I'm still of that view. Larry's ability to hit the right price for PeopleSoft is one aspect of this saga, but getting regulatory approval for this deal is a whole different can of worms. On this basis, it’s still hard to predict the outcome of Oracle's hostile bid for PeopleSoft, but I’m inclined to believe that Oracle is unlikely to succeed. Given the discount to the bid on Friday, I think the market shared my view. So, I'm not that surprised that PeopleSoft rejected the bid.
The real issue in this hostile takeover is whether the Justice Department, state attorneys general and EU authorities rule against the merger. If so, it's not necessarily legally dead, but I can't see Oracle persisting. Time was the enemy when Oracle was thinking of preventing the J.D. Edwards deal. The Oracle bid for PeopleSoft probably ends if there is an anti-trust finding against Oracle. Although this one is still close to call right now, I'm still inclined to think the bid fails.
I know a bunch of folks who argue that this should NOT be an anti-trust issue. But in my opinion, it is and the anti-trust issue is with the apps business - both ERP and CRM. Removing PeopleSoft from the ERP business (particularly now that it bought JD Edwards) leaves SAP with a likely more dominant share of the business than today. If you look at the high end of the market they have about 35-40% right now and it would be >50% if Oracle buys PeopleSoft. There are many that will not buy the PeopleSoft product even if Oracle swears it will continue to "support" it. Folks will assume that Oracle will underinvest in the further development of the app - and no one wants to invest in ERP software that is bound to become obsolete in 4-5 years. Oracle buying PeopleSoft means death to the CRM portion of the business and concentrates the call center software market squarely in the hands of Siebel. Same reason. If you define the market a bit more broadly to include the upper mid market for ERP and to a lesser extent CRM, the concentration picture is a little less bad - but not that much. Oracle would most likely benefit from this. The Clayton Act doesn't require a market become a monopoly to act to bar a merger. It only has to have a bad impact on the competitive dynamics.
As far as I’m concerned, the Oracle bid for PeopleSoft only makes sense within the orbit of the Ellison ego. But Oracle didn't play its cards right. Management’s attempt to talk down PeopleSoft's product line by saying it was going to discontinue the products was a misstep. It made a lot of people angry. And made a hostile takeover that much more hostile. Maintenance of Oracle's customer base, that's what it was about. Oracle was going to take the PeopleSoft products it liked and leave the rest while keeping the maintenance revenue stream. Even if that was Oracle's intention the company never should have made it public. Big mistake.
However, from a shareholder value perspective it could be argued that the deal should get done. For example, take the most recent bid of $26. On the basis of company fundamentals, I just don't think PSFT is worth that much. Maybe $16, $17 ... $18 tops, but not $26. So, a 44% premium to (what I estimate as) fair value would be very attractive. Perhaps PSFT shareholders will see the greatest value to themselves lying with approving the Oracle acquisition at an even higher price. I think if you are a major shareholder and you don't go for the Oracle deal, from a purely financial perspective you should have your head examined. I’m not saying that I think the deal will get done; I’ve already stated I believe it will get blocked due to regulatory matters. I'm just saying that is one scenario whereby this deal could get done since, financially speaking, it really is in the shareholders interest. Take the cash now and buy ORCL or SAP stock. Holding PSFT at around $22 (roughly it's current levels) is not the best financial choice available for a shareholder when there is a bid for $26, or perhaps even more, on the table.
PS: I see in Wednesday's (or was it Thursday's) WSJ that Oracle is "soliciting support for a possible court battle with the Justice Department to defend the company's hostile bid for PeopleSoft". This is not surprising; and as I've said before, the outcome of this takeover bid will more than likely hinge on anti-trust issues.
That said, I don't think the DOJ should be futzing around in these matters - it's bad law. On the other hand, if Oracle buys PeopleSoft, then it's bad for PeopleSoft users and the apps business generally because it will wind up concentrating more of the business in SAP's hands when a bunch of customers flee from Oracle.
Cheers
Melanie Hollands
President
Koala Capital, LLC
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