For Sybase, It's Buyback or Buyout

A new hedge fund stake makes the software company's future one to watch for investors.
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SAN FRANCISCO -- On its earnings call next week, Sybase (SY) - Get Report should give investors a big clue to its future, which should include the company boosting its stock buyback program by a wide margin.

If such an announcement isn't forthcoming on Oct. 25, the software developer becomes a sitting duck for a buyout by

Oracle

(ORCL) - Get Report

or other big business software vendors looking for business "mobility" software.

A larger buyback -- or a sale of the company -- are two of three options that were advocated by hedge fund

Sandell Asset Management

in a letter to Sybase last Friday. Sandell's CEO, Thomas Sandell, also suggested the spinoff of the company's mobile software offerings as another option.

Sandell recently acquired 5.4 million shares, or 6% of the Dublin, Calif., company.

Sybase chairman and CEO John Chen replied in a letter on Monday that the board would consider his recommendations. The stock closed Monday at $26.12, up 6.8% since Sandell's letter was made public.

Sybase closed Tuesday at $25.77, off 35 cents, or 1.3%.

Oracle would likely prefer that Sybase spin off its mobile software. This is preferable to swallowing the company whole; Oracle could well be in the market for mobile integration software.

In addition to database products, Sybase develops software that manages integration and security issues when enterprise software is linked with employees' mobile devices, like cell phones and handheld computers.

Without mentioning specific targets, Sheila Ennis, a principal with investment bank McNamee Lawrence said Monday that Oracle's next acquisition target could well be a software vendor that extends security and integration to mobile devices.

On Friday,

Oracle bid $6.6 billion for middleware developer

BEA Systems

(BEAS)

. Since 2005, Oracle has essentially become a software consolidator, closing deals on 35 companies.

Buying all of Sybase would cause Oracle "the pain and agony" of having to either integrate or separately maintain Sybase's database products and large customer base, as well as its own, says Gene Phifer, vice president and analyst at Gartner. "The cost of rationalizing the databases would have to be more than offset by the mobility technologies."

"But with Oracle, never say never when it comes to acquisitions," Phifer adds.

Indeed, Oracle has a history of boosting market share by buying firms with competing software. In 2005, it bought competitor PeopleSoft for $10.3 billion and has maintained that portfolio separately.

SAP

(SAP) - Get Report

, which on Monday reportedly said it wouldn't bid for BEA but also doesn't rule out more large acquisitions, could be interested in Sybase's database software, which is more broad and robust than the limited database capability SAP has built to support its Business ByDesign on-demand software, Phifer says.

SAP's business in many respects is comparable to Oracle's, except for SAP's lack of standalone database software. Sybase's database product line could be a complementary addition to SAP. Database software makes up approximately 70% of Oracle's license revenue.

Hewlett-Packard

(HPQ) - Get Report

could also be a buyer, but only if it were first to buy BEA, Phifer said Monday. If H-P were going in that direction, "we probably would have seen a bid today" for BEA.

Ultimately, Sandell may be satisfied with a speedier and more generous share repurchasing program. For the first six months of 2007, Sybase bought back nearly $59 million in stock, leaving $191 million in its program for the second half of the year, according to the company.

But the buybacks so far have done little more than use incremental cash generated by the company -- and Sybase's cash balance continues to grow, Sandell stated.

At the end of June, Sybase had $658 million in cash and short-term investments, according to the company. And its full-year cash flow from operations is expected to be $195 million to $205 million.

While a bigger repurchasing program doesn't preclude a move on Sybase by a larger company, it would raise the share price and make it a more expensive target.