A Smart, Sleazy Stock Striptease

Oracle's dangerous liaison with PeopleSoft mixes flirtation with rejection.

Tim Beyers
Tim Beyers
Oct 12, 2004 at 12:00AM
Other

Go ahead and admit it. You've flirted before. You may have even been the subject of a naughty little striptease. Heck, maybe most of us have. That's at least the subliminal message of Disney's (NYSE:DIS) juicy new nighttime soap, Desperate Housewives. Although its connection with reality is tenuous at best, Desperate Housewives underscores the very human notion that a failed flirtation can be the most dangerous of liaisons. So can you imagine what it's like to be at PeopleSoft (NASDAQ:PSFT) these days?

This week, Oracle (NASDAQ:ORCL), which has lustily pursued PeopleSoft for more than a year in an often-sordid affair, proclaimed it didn't really love the business software maker after all. At least, not at its current price tag. Talk about a letdown.

Of course, this game of hard-to-get is more than a flirtation. Oracle is proposing a complete buyout of PeopleSoft. The combined OracleSoft could become a formidable entity in the business software market, presenting a stiff challenge to market leader SAP (NYSE:SAP). But on the stand in a courtroom battle over the legality of PeopleSoft's anti-takeover provisions, Oracle CEO Larry Ellison said his team is considering lowering its $7.7 billion bid. And yesterday, Oracle Co-President Safra Catz said PeopleSoft was no longer a viable stand-alone entity. Call it the "I love you because no one else will" strategy.

I understand the approach, of course. Frankly, Oracle has no choice but to pursue this course because Catz and Ellison are both right. PeopleSoft's results have been dismal lately. This quarter's upbeat guidance doesn't change that. Indeed, the company still trades at a hefty 28 times its expected earnings and 22 times its free cash flow. By contrast, Oracle trades for 18 times its expected earnings and 17 times its free cash flow. For a poorly performing firm, PeopleSoft is premium-priced.

So far, PeopleSoft has expressed no public reaction to the comments. But that doesn't mean retaliation isn't in the works. A Securities and Exchange Commission filing this morning shows the firm has extended its highly controversial customer assurance program, which promises big rebates if there is an acquisition.

There is also a chance that the board will decide it can find a better mate that will treat it with the love and respect it deserves. Microsoft (NASDAQ:MSFT) has already said it won't come calling, but IBM (NYSE:IBM), which last month started dating PeopleSoft, could still agree to make a commitment.

At least one thing is clear: If Ellison and team do convince PeopleSoft to accept a more modest proposal, then they will have to come to the altar with flowers, candy, and an apology at the ready.

For more on the OracleSoft affair:

Fool contributor Tim Beyers owns shares of Oracle. You can view his Fool profile and other stock holdings here.


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