Oracle's High Hopes in BEA Deal

SAN FRANCISCO -- BEA Systems(BEAS Quote) had been a reluctant buyout candidate. However, after years of rumored deals that never proved true, the software developer finally hitched its wagon Wednesday to arch competitor Oracle(ORCL Quote).

The Redwood City, Calif. software conglomerate dug deeper into its pockets to add BEA to its stable of software acquisitions for a cool $7.2 billion, net of BEA's cash on hand.

Oracle persevered in order to become the No. 1 middleware provider, dislodging IBM(IBM Quote) from that spot.

By agreeing to pony up an additional $2.375 a share above its October offer, Oracle will add $1.67 billion in expected 2009 revenue from BEA to its top line.

BEA shareholder Carl Icahn endorsed the deal, attributing it to management's cooperation with the shareholder activist.

Investors also liked the news, sending Oracle shares up 34 cents, or 1.6%, to $21.65. BEA rose $2.98, or 19.1%, to $18.56.

The price tag looks expensive on an enterprise-value-to-revenue multiple of 4, compared to other acquisitions of Oracle such as the 2.8 multiple it paid for Hyperion, 2.4 for Siebel Systems, and 3.6 for PeopleSoft, JMP analyst Pat Walravens wrote in a note Wednesday. JMP makes a market in Oracle.

The deal seems more reasonable from the perspective of BEA's EV to maintenance of 6.8, which is comparable to Hyperion's, Walravens added.

Oracle wanted BEA primarily for its maintenance revenue stream. As a result, Walravens estimates Oracle will pick up about $870 million a year in such ongoing support payments.

After the initial integration costs, the deal could add around 10 cents to Oracle's EPS, excluding items, Walravens estimated.

The BEA-Oracle deal makes Tibco(TIBX Quote) a more attractive acquisition target, Walravens wrote. That middleware developer was up 62 cents, or 9.2%, to $7.37 on the news.

BEA became an acquisition target because the growth of its new license revenue had slowed, and the company was under pressure from analysts and investors like Icahn to boost new contracts or find an acquirer, said Melissa Grady, analyst with Technology Business Research.

In October, BEA spurned Oracle's offer of $17, saying it was too low. Grady said BEA's disclosure of its financial reports in November brought clarity to BEA's value and cleared the way for further negotiations.

BEA's earnings report revealed that the company had reduced expenses and improved margins, Grady said. "Another factor was that [BEA] slowed its license revenue decline, and they are predicting some growth there" for the quarter that ends in January.

BEA has a technologically strong middleware product, known as AquaLogic, that Oracle can integrate, Grady said. BEA had not had sufficient resources to market the product, something Oracle is likely to do, she said.

And BEA's WebLogic communications software for telecoms will fill in a gap in Oracle's software portfolio. BEA already has some significant telecom clients in Asia, Grady said.

There is product overlap between the two companies, but BEA's products are the best of the breed, said Sheryl Kingstone, director of enterprise applications for the Yankee Group.

Oracle has been "living that nightmare" of integrating its dozens of acquisitions for the past two years, Kingstone said. "BEA's product suite can help uncomplicate that for their customers."

SAP(SAP Quote), Oracle's chief competitor in application software, said the deal shows that Oracle's Fusion middleware, which it begins delivering to customers in 2008, is in trouble. "They have had to take the unusual and expensive step of adding another middleware layer to their already complex environment," Bill Wohl, vice president of strategic communications for SAP, said.

Middleware enables diverse business software applications to interoperate. Oracle has acquired more than 30 software development companies since 2005, building a strong maintenance revenue stream from each developer's client base.