In The News

Oracle may need to boost takeover bid

Analysts see several ways the PeopleSoft fight could go

By Mike Tarsala, CBS.MarketWatch.com

Last Update: 10:37 AM ET June 10, 2003

SAN FRANCISCO (CBS.MW) -- Wall Street is speaking to Oracle CEO Larry Ellison, telling him it thinks his $5.1 billion hostile bid for rival PeopleSoft is a lowball offer.

In the third day of trading after Ellison offered to buy PeopleSoft and move its customers to Oracle (ORCL: news, chart, profile) software, shares of PeopleSoft (PSFT: news, chart, profile) were at $17.90 early Tuesday, making Ellison's $16-per-share bid more than 10 percent below PeopleSoft's $5.67 billion market value.

Money talks. To grab the ear of a skeptical board and PeopleSoft shareholders who believe in the leadership of CEO Craig Conway, Ellison may soon have to up the ante, said several bankers and analysts who are tracking Oracle's bid for PeopleSoft and PeopleSoft's effort to buy rival software maker J.D Edwards (JDEC: news, chart, profile).

"It's clear that Oracle is going to have to raise its offer," said Bruce Daley, editor of a newsletter that tracks application software companies. "Ellison might be forced to make the offer so attractive that PeopleSoft's board overcomes its distaste and views the whole thing as a friendly takeover."

Chris Bonavico, fund manager with TransAmerica in San Francisco, agreed: "Ellison is going to have to go to PeopleSoft shareholders with an offer that they're going to accept. I'm sure they'll put something on the table that the shareholders will consider."

Acquiring companies have paid about a 32 percent premium in hostile takeover bids in recent years, excluding some deals in 1999 that would skew the average price higher, said Ken Marlin, an investment banker with Marlin & Associates in New York. Looking only at deals with "poison pill" provisions like PeopleSoft has, the average premium was 37 percent. Oracle started its bid with a 6-percent premium to PeopleSoft's share price.

At the offered price of $16 a share, buying PeopleSoft would have clear benefits for Oracle, said Patrick Walravens, an analyst with JMP Securities. It would immediately boost Oracle's sales and likely its profit, as Oracle could find many places to slash costs.

"PeopleSoft spends $620 million a year on sales and marketing and general and administrative costs alone," Walravens said. "How much of that do you need when you're eliminating the company's products?"

A PeopleSoft spokeswoman said Monday that the company's board will review Oracle's offer and will take "appropriate actions going forward." On Friday, Conway dismissed the offer as an attempt to disrupt his company' s plan to buy J.D. Edwards. He called Oracle's offer, "atrociously bad behavior from a company with a history of atrociously bad behavior."

In a letter issued Monday, Oracle's Ellison describes his offer as "full and fair value" for PeopleSoft, a company best known for making software used by human resources departments at large corporations. "We have made a serious, fully financed, all-cash offer to your stockholders, and your fiduciary duties to those stockholders require a full and fair review done in good faith," Ellison said.

Oracle is offering about $5.1 billion in cash for a company that generates about $800 million a year in software maintenance revenue. With about $2 billion in cash and equivalents on PeopleSoft's books, the net offer is $3.1 billion. That looks "a tad low" right now, said David Dobrin of B2B Analysts, a firm that sells its research to Wall Street brokerages.

Ellison's bid could start looking more attractive later this month, as PeopleSoft approaches the end of its second quarter, Dobrin says said. He projects that PeopleSoft will have trouble meeting sales targets as confusion about the Oracle and J.D. Edwards bids scares away would-be customers. As a result, the company's stock will suffer, and board members will have reason to take a closer look at the offer that's on the table.

"Oracle has introduced uncertainty in the marketplace, and PeopleSoft has deals it's trying to close by the end of June," said Paul Hamerman, analyst with market research firm Forrester Research in Cambridge, Mass. "This is going to delay buying decisions, and it could impact the company's license revenue."

Ellison is smart enough to know the damage his offer would do to PeopleSoft's sales, Dobrin says. He points out that Ellison's deal could be a very good offer if PeopleSoft shares fall to $12, due to sales declines.

But Oracle may be forced to increase its bid regardless of what happens to PeopleSoft shares, according to Daley. He says Oracle might counter with a higher price if PeopleSoft drops a "poison pill" provision that protects current management during hostile takeovers by making the deal more expensive for the bidding company.

"If Oracle were to offer $19 a share, it would cost Oracle $6 billion in cash. Then they would get the $2 billion back from PeopleSoft," Walravens said. "It seems like that would be a reasonable position for the company to be in."