IBM Taking Over PeopleSoft? Analysts Remain Skeptical.

A rumor roils the market and embroils the biz press. But analysts say it ain't gonna happen.
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SAN FRANCISCO -- Shares of

PeopleSoft

(PSFT)

extended Wednesday's gains on continued speculation that

IBM

(IBM) - Get Report

would make a bid for the Pleasanton, Calif.-based enterprise-software company. Though most analysts have not yet put out official reports to address the rumor, privately they are quite skeptical.

PeopleSoft ended Thursday up 2 3/4 at 24 7/16, nearly 13% higher than Wednesday's close, as more than 20 million shares changed hands -- well above the average daily volume of 5 million shares. Shares of PeopleSoft hit a high of 25 1/8, their highest level since Oct. 20, the day the company reported third-quarter earnings with a warning of slowing revenue growth. The following day, the stock tumbled as analysts from

Merrill Lynch

,

Prudential Securities

and

Dain Rauscher Wessels

scrambled to downgrade it.

But Wednesday, PeopleSoft shares started to move up dramatically and call-buyers swarmed in on the IBM takeover rumors. The January 20 and 22 1/2 calls, which each traded more than 2,000 contracts Wednesday, are already in the money. On Thursday, options traders set their sights higher. The most active calls were at the January 22 1/2 and February 25 strikes, New York options traders said.

The rumor flooded the Street, and

CNBC

and

Dow Jones

fanned the fire by reporting the news Thursday (

TheStreet.com

cited the rumor Wednesday, explaining the jump in PeopleSoft shares). Thursday, both IBM and PeopleSoft declined to comment on the news.

But the recent run-up on the rumors could only be a temporary blip. To the uninitiated, the deal could look attractive. After all, IBM had great success with its purchase of

Lotus Notes

, another massive software concern that added to IBM's bottom line. "IBM makes a ton of money off of its software division," notes Amir Ahari, senior analyst at

International Data

.

Software and services currently constitute 55% of Big Blue's profits, according to Merrill Lynch hardware analyst Steven Milunovich.

Brian Skiba, an analyst at

Lehman Brothers

, which has no underwriting relationship with PeopleSoft, also points out that "

enterprise resource planning vendors have the account control today. Years ago, you were an 'IBM' or '

Digital

' shop, then '

Oracle

'

(ORCL) - Get Report

or '

Sybase

'

(SYBS)

, now '

SAP

'

(SAP) - Get Report

or 'PeopleSoft.' So, controlling the transactional backbone in a global organization provides an incredible degree of account influence."

IBM could also benefit from PeopleSoft's e-business initiative, which Skiba sees as more visionary now than IBM's plans. PeopleSoft, which desperately needs to increase research and development efforts to catch up to the likes of SAP, could gain from IBM's $80 billion revenue stream, he says.

So the pie-in-the-sky merger looks good -- but when pencil hits paper, the numbers just don't add up. The financials, say analysts, will doom such a deal.

"I don't think it's likely to happen for financial reasons," says Skiba. "IBM has been an aggressive buyer of its own shares, precluding pooling as a transaction style." Companies generally prefer merging, or "pooling," balance sheets in an acquisition because it is tax-free and does not require goodwill charges to weigh on future earnings reports.

As a result, Skiba says IBM would be forced to make an outright purchase of PeopleSoft if it wanted the software company. But a purchase "would burden the income statement for years to come at a rate of $1 billion-plus annually," he says. "Unlikely to happen."

Such a deal would also be a negative for PeopleSoft, he says. "PeopleSoft would be less likely to sell given the plummet in the stock valuation," Skiba says. "They remain upbeat and optimistic on the prospects for the company."

But some analysts remained hesitant to write off the talk so quickly, preferring instead to consult their sources before issuing any official comments. "I think it's too early to make any comment," says one analyst who asked not to be named but whose firm has no underwriting relationship with PeopleSoft. "After all, it

is

IBM."

Senior news writer Dan Colarusso and staff reporter Eric Moskowitz contributed to this report.