And so it ends.
This morning, Oracle
That's right, folks. After more than a year of come-ons, rejections, and legal spats, OracleSoft is a reality. Oracle CEO Larry Ellison said in a conference call that he expects the deal to add $0.01 per share in earnings in fiscal 2005 and $0.08 per share in fiscal 2006 on a pro forma basis. PeopleSoft isn't expected to aid the bottom line using generally accepted accounting principles, or GAAP, until sometime in fiscal 2007, or about two years from now.
Oracle's management team explained the 10% increase from the so-called "final" offer of $24 per share in November by saying they were provided with new financial information by PeopleSoft's board of directors over the weekend. The new data, painted as more accurate by Ellison, apparently revealed that PeopleSoft's maintenance and support operations were more profitable than originally expected.
Regardless of the reasons, the deal creates a software powerhouse that appears to already be growing well. After backing out a 4% gain because of favorable currency rates, in its second quarter, Oracle grew sales by 6%, to $2.8 billion, and net income by 23%, to $815 million, over the same period last year. Earnings per share came in at $0.16, 35% higher than last year's $0.12, aided by a four-point boost in operating margin, which rose to 41%.
Mix those stellar results in with PeopleSoft's expectations, and it is no wonder Oracle's shares are up nearly 10% in morning trading.
PeopleSoft expects its fiscal 2005 GAAP earnings to be anywhere from $0.82 to $0.87 per share. Though I've had my doubts that the company could achieve that run rate, or the 12 points in operating margin improvement it has estimated, something in the numbers Ellison saw this past weekend must have convinced him that the projections weren't all that far off. So, figuring PeopleSoft ends fiscal 2004 with $3 billion in sales, OracleSoft could begin life as a $12 billion company. That would make the firm more than 25% larger than its biggest rival in business applications software, SAP AG
All told, the deal is a major victory for Ellison, who fought off not only a hostile PeopleSoft board but also a hostile Justice Department and a legion of doubters over the past 18 months. Congratulations are clearly in order. But don't party too long, Larry. The hard part is just beginning.
Despite the synergies here, big mergers have a history of failure. Plus, the $10.3 billion price tag for PeopleSoft will likely force Oracle to take on new debt. My guess is at least $2 billion worth. Chief Financial Officer Harry You says the company would aim to pay off any financing it acquires within two years. That's probably doable, but interest paid is still money unavailable for funding integration and growing the overall business.
Then there's the disparity in operating margin between the two companies. PeopleSoft says it's working on creating efficiencies, but even if it makes good on its promise of a 16% operating margin next fiscal year, there's still more than 20 points of difference between the two companies in this key metric. That means deep cost cuts are inevitable.
Don't get me wrong: I'm very much for OracleSoft. But Oracle is paying big to get what it wants. That makes me nervous. Yet I'm encouraged by PeopleSoft's massive maintenance revenue stream, which should have a profound impact on cash flow and, ultimately, the balance sheet. That's really where Foolish investors playing the OracleSoft home game ought to focus their attention as this deal gets done.
For related Foolishness:
- Would you believe that Oracle first bid for PeopleSoft last June?
- It turns out no didn't really mean no after all.
- Investors ought to hope that PeopleSoft's crystal ball doesn't break.
- I made my first case for OracleSoft back in March, and then again in August.
What do you think? Is this is the right deal for Oracle investors? Should PeopleSoft investors be disappointed? What's the next big stock market deal? All this and more at the Oracle and PeopleSoft discussion boards. Only at Fool.com.