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Wall Street greeted



cocky rejection of


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latest bid with skepticism Thursday, suggesting that the takeover target's bullish guidance is overly optimistic.

"We are concerned that PeopleSoft is elevating expectations to unreasonable levels in order to convince shareholders to side with the board in opposing Oracle's tender offer," Sanford C. Bernstein Sanford analyst Charlie Di Bona wrote Thursday. (Di Bona has an underperform rating on PeopleSoft; his firm doesn't do investment banking, but its parent, Alliance Capital, is long PeopleSoft.)

On Wednesday, PeopleSoft

not only rejected Oracle's "best and final offer" of $24 a share, or $8.8 billion, but surprised analysts by issuing guidance through the end of fiscal 2005.

Moreover, the business software vendor made it clear that it will not surrender, even if more than 50% of its shares are tendered to Oracle by that company's proclaimed deadline of Nov. 19. The offer, said Co-President Kevin Parker, is nothing more than "a nonbinding straw poll." The company, he said, will continue to fight until PeopleSoft's shareholder meeting in the spring.

The net effect of that news on the shares of the two companies wasn't great. In recent trading, shares of PeopleSoft were off 23 cents to $22.56, while Oracle was down 26 cents to $13.12.

PeopleSoft used a conference call Wednesday evening to makes its case for a better offer. "We told Oracle that its price must reflect both PeopleSoft's intrinsic value and the fact that PeopleSoft is materially more valuable to Oracle now than it was when Oracle made its inadequate $26-per-share offer," said PeopleSoft board member George "Skip" Battle.

Additionally, PeopleSoft said it expects pro forma earnings excluding charges of $1.05 to $1.10 a share on revenue ranging from $2.8 billion to $2.9 billion, including license revenue of $640 million to $655 million for fiscal 2005. That's considerably higher than the consensus pro forma earnings estimate of 77 cents a share from Thomson First Call, but the midpoint of the sales range falls short of the $2.88 billion in sales forecast by analysts.

Guidance for the current, or fourth, quarter was light, calling for $700 million to $715 million in revenue and a pro forma profit of 20 cents to 22 cents a share.

Analysts projected that PeopleSoft would have to cut $100 million in operating expenses, cut head count meaningfully or enjoy an unlikely jump in license sales to meet its ambitious margin targets. They noted that PeopleSoft's forecast calls for 20% pro forma operating margins in fiscal 2005, a significant jump from the 15% projected by the company for 2004. In addition, PeopleSoft is forecasting a 5% to 10% increase in license revenue, after an expected 5% drop in 2004, including pre-acquisition revenue from J.D. Edwards.

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Pacific Crest analyst Brendan Barnicle said PeopleSoft employed a similar tactic -- overly optimistic guidance -- in September 2003 to fend off Oracle's bid. "While it may prove an effective anti-takeover defense, it is not realistic guidance," wrote Barnicle, who maintained his 2005 earnings estimate of only 76 cents a share. (Barnicle has a sector perform rating on PeopleSoft and his firm hasn't done banking with the company.)

In fact, analysts noted that the company's latest license-revenue target for both 2004 and 2005 still falls short of the overly optimistic guidance for 2004 provided in September 2003, while the latest 2004 earnings target is still short of the original overly bullish guidance for 2004.

That's significant because PeopleSoft is arguing that it is worth even more now than Oracle's highest bid of $26 a share in February 2004, which was based on that previous optimistic guidance, even though PeopleSoft's latest 2004 targets are now lower than they were in February.

PeopleSoft countered those arguments, saying it will achieve the margins through a variety of initiatives, including increasing offshore resources, focusing on emerging markets such as on-demand applications and the small- and medium-sized business market, and its analytics business.

The company has argued Oracle's bid is too low because it values the company at about 22 times 2005 earnings guidance. PeopleSoft argues that other software vendors such as

Siebel Systems



Computer Associates


Mercury Interactive


are trading at more than 30 times earnings.

PeopleSoft also noted that based on a multiple of enterprise value to its maintenance revenue, which Oracle has said is PeopleSoft's most attractive asset -- Oracle's latest $24 bid represents a 24% decline from its highest bid of $26 a share.

One firm, EKN, lowered its rating on PeopleSoft to underperform from market perform, saying that Oracle may well walk away, and that could remove the premium on PeopleSoft's shares.

However, other analysts said they believe more than 50% will tender their shares and $24 is a fair price. Wachovia Securities analyst Kash Rangan noted higher price-earnings multiples fetched by other companies such as


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are warranted because they've demonstrated organic license of 10% to 16% year over year.

Rangan argued that Oracle's bid prices PeopleSoft at 20 to 21 times free cash flow, which he calls "a fair multiple" compared with Oracle trading at 18 times free cash flow. (Rangan does not have a rating on PeopleSoft or Oracle; both companies are Wachovia clients.)

But one of the few analysts who reacted positively to PeopleSoft's latest move, Lehman Brothers analyst Neil Herman, said the company's higher financial targets means there is less downside risk to the stock price, which he believes is now $19 to $20 compared to his previous thinking of $17 to $18. "We are encouraged by the confidence PeopleSoft's board of directors and management are showing longer term for the company," said Herman, who has an equal rating on PeopleSoft. (His firm has done banking with the company.)