Smaller Players May See Oracle Windfall

It's no news to investors that Oracle's(ORCL) $10.3 billion acquisition of PeopleSoft(PSFT) is a competitive threat to giants like SAP(SAP) and IBM(IBM).

But the market has yet to focus on opportunities that the mega-merger may create for smaller software players such as Mercury Interactive(MERQ) and BEA Systems(BEAS).

Both companies own technology that Oracle is likely to adopt. Perhaps most notably, says FTN Midwest analyst Trip Chowdhry, BEA will be in a position to force the database giant to pay significantly more for its fading Tuxedo platform, a key building block of PeopleSoft's applications. "The contract between PeopleSoft and BEA is up within the next six months; I expect BEA to play hardball. BEA will realize that it can get much more from Oracle than the $6 million to $10 million a year PeopleSoft is paying," he said in an interview.

The extra Tuxedo revenue would be a big plus for BEA since it would likely come without spending significant amounts of development money. Tuxedo is one of BEA's oldest products and now accounts for only about 10% its total revenue.

Even so, Oracle's well-documented interest in acquiring BEA is apparently on hold while it digests PeopleSoft, and that removes a catalyst that has been responsible for some of BEA's second-half rally, increasing about 40% since early August.

Mercury, which makes software for testing and managing applications, will come out ahead in the short to medium term because Oracle has already standardized its testing products and may well enforce their use for the combined company, Chowdhry said.

In the longer run, however, Mercury could lose out if Oracle elects to buy IT governance products from Niku(NIKU). Chowdhry said his sources suggest that Oracle, which is currently evaluating Niku's products, is impressed with offerings from the Redwood City, Calif., software vendor.

(Chowdhry's company does not have an investment banking relationship with any of the companies mentioned in this story.)

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