Updated from 3:17 p.m. EDT

Oracle's ( ORCL) $5.1 billion offer for PeopleSoft ( PSFT) is a move calculated to take out a dangerous rival, plug a gaping hole in its business and -- inherit a significant revenue stream.

The Friday morning offer caught the market by surprise, (some analysts thought it was a joke at first) but when traders got the news they quickly pushed PeopleSoft up more than 23%. PeopleSoft, however, was dismissive.

The Pleasanton, Calif. maker of business software said the offer was an attempt to disrupt its just-announced acquisition of J.D. Edwards ( JDEC). A statement from PeopleSoft CEO Craig Conway called the offer "atrociously bad behavior from a company with a history of atrociously bad behavior." Under the law, the company must review Oracle's tender offer and make a recommendation to shareholders.

Sounding entirely disnterested in the Oracle deal, PeopleSoft CFO Kevin Parker said his company's directors will meet within the next few days to decide.

Parker said that PeopleSoft's interest in JD Edwards is unchanged and the acquistion is moving forward. But Ellison said his company has not yet decided on a course of action concerning JDEC, if the PeopleSoft acquisition goes through.

At the close Friday, PeopleSoft was up $2.71, or 18%, to $17.82; JD Edwards added 41 cents, or 3.2% to $13.20, and Oracle was off 28 cents a share, or 2%, to $13.08.

"At these prices, this (Oracle's offer) is a take-under," said First Albany analyst Mark Murphy. "It would surprise me if PeopleSoft would sell unless the offer gets better."

Ellison made his case in a prepared statement: "The acquisition of PeopleSoft will immediately make Oracle an even more profitable and competitive company. Although we will not be actively selling PeopleSoft products to new customers, we will provide enhanced support for all PeopleSoft products. Furthermore, we will be incorporating the advanced features from the PeopleSoft products into future versions of the Oracle eBusiness Suite."

Oracle said its plan would be to launch a cash tender offer for PeopleSoft's shares, which it expects to begin on Monday. Ellison has submitted a letter to PeopleSoft's board of directors in which he expressed a desire to discuss the offer with the company.

Buying PeopleSoft is a remarkable admission of failure in Oracle's efforts to build a successful applications business, said Richard Williams of Summit Analytic Partners.

The long-time leader in databases, Oracle has tried, with limited success, to expand its business by developing applications that could compete with PeopleSoft, SAP ( SAP) and Siebel ( SEBL). Buying PeopleSoft and letting its applications stagnate is an attempt to force PeopleSoft customers to move to Oracle's application, said Brueschke. Neither Brueschke's, Murphy's nor Williams' companies have a banking relationship with Oracle or PeopleSoft.

In a call with analysts, Ellison said he was not planning to muscle PeopleSoft customers. "I want to emphasize we're not going to push the PeopleSoft customers to move to Oracle, or even to move to the latest version of PeopleSoft. Our intension is to improve and extend the support services to their customers."

Of course, those customers may well defect to SAP anyway, much as some former Informix database customers jump to Oracle after IBM ( IBM) purchased it, Brueschke noted.

And that raises another interesting possibility: IBM could jump in with a competitive offer for both PeopleSoft and J.D. Edwards to put pressure on both Oracle and SAP.

Williams said another important plus for Oracle is PeopleSoft's $455.82 million stash of deferred revenue Williams said. "The deal looks (mainly) like a make-the-next-few-quarters move," he said in an interview.

With normal writedowns, Oracle might be able to discount as much as 50% of PeopleSoft's deferred revenue while actually netting nearly all of it. That plus PSFT's $239 million in cash and equivalents, another $1.7 billion in short term investments, and an $800 million maintenance revenue stream would take much of the sting out of the high purchase price.

Moreover, debt is very cheap right now, and Oracle could well borrow at least some of the cash it needs to make the acquisition, perhaps using zero coupon bonds, said Jason Brueschke of Pacific Growth Equities. In fact, Credit Suisse First Boston LLC has provided a bridge financing facility and is advising Oracle on the transaction.

At the end of February, Oracle had $4.01 billion in cash and equivalents and another $1.9 billion in short-term investment.

The Edwards Issue

The pending Peoplesoft JDEC combination would be a potent threat to Oracle, which Ellison is attempting to derail one way or the other.

"Despite several efforts, PeopleSoft has not been a serious contender in most manufacturing industry software deals," said Mike Dominy, an industry analyst with the Yankee Group. "J.D. Edwards'smanufacturing experience, application functionality, and customers add credibility to PeopleSoft's 2003 manufacturing push."

Separately, Oracle said it will meet or exceed consensus earnings estimates for the fiscal fourth quarter. Based on preliminary results, the company expects to earn 14 cents to 15 cents a share in the quarter.

David Sterman, a contributor to Street Insight, a sister site to TheStreet.com, said just after news of the bid broke that Oracle's offer was "curious."

"There is a lot of overlap, so it's not a perfect fit," Sterman wrote on Street Insight. "But it would be the final nail in the coffin for struggling Siebel Systems, which is already losing share to the suite guys."

Sterman is the director of research for Chelsea Research, which provides sector-based analysis to financial institutions.

On a conference call after the unsolicited bid was announced, Oracle said PeopleSoft broached the subject of combining the two company's applications businesses, but the terms weren't right. PeopleSoft's Parker said that was true, but dismissed any implication that PeopleSoft had at the time expressed interest in selling itself to Oracle. Oracle also said it believes its offer is superior to the company that would be created by a merger of PeopleSoft and J.D. Edwards.

Oracle is still "very interested" in J.D. Edwards, executives said on the call, but it's keeping its options open. Executives also said the combined Oracle/PeopleSoft would be a more competitive company offering a greater revenue opportunity and chance for cost savings.

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