Let me get this straight. A bidding war for BEA Systems (NASDAQ:BEAS) is nigh because Carl Icahn thinks Oracle's (NASDAQ:ORCL) $6.7 billion proposal for the company is too low?
That may be about the dumbest thing I've ever heard.
Glory days will pass you by
Yes, I'm an Oracle shareholder. But I'm as amused as anyone else when CEO Larry Ellison dismisses software as a service as a here-today-gone-tomorrow fad. Every serious claim from Ellison and his team is to be taken with a giant boulder of salt.
Yet when Oracle President Charles Phillips recently told investors that BEA had "become less relevant," he had facts on his side. Researcher IDC pegs IBM (NYSE:IBM) as the world leader in "middleware," so called for how the stuff is used to connect systems that wouldn't otherwise talk to each other. Think of middleware as a referee for your networked computer systems.
BEA, meanwhile, ranks second in the market that it helped to create, and at the end of 2006, its market share was only about one-third that of Big Blue's. Oracle, meanwhile, recently doubled its revenue from middleware and maintains about a 9% share of the market, again according to IDC.
Read that paragraph again. Then, consider this: Six years ago, BEA led the middleware market. So why buy a struggling vendor whose best days may already be behind it?
I'll take "synergy" for $200, Alex
Perhaps because BEA and Oracle are natural partners. Here's how Forrester Research put it in a recent note to its clients: "A combination of Oracle and BEA makes good sense. Oracle and BEA have many opportunities for synergy in their market positions and strategies as well as in their product lines."
First on Forrester's list of "synergies" are the customer lists. BEA and Oracle share many clients who've spent years forging a bond between BEA's middleware and Oracle's database. A merger could help these folks, as long as service and support are properly integrated.
Forrester also likes where Oracle isn't: in telecommunications, financial services, and government accounts. BEA has a big presence in each, Forrester writes.
And that makes sense. BEA has for years specialized in enabling electronic transactions that must be delivered with a high degree of speed and security. You'll not find a group of customers more interested in speed and security than those operating in the telco, financial-services, and government sectors.
Big bucks from Big Blue?
As much as a deal at the right price could work for Oracle -- more on that in a moment -- I'm not at all sure there's a reason for a competing bid from anyone. Yet Forrester says IBM is the most likely candidate to counter and that Sun (NASDAQ:JAVA), Cisco (NASDAQ:CSCO), and Software AG should all have an interest.
Really? Why? Look at the numbers. BEA trades for 50 times earnings, has a PEG ratio nearing 3, and charges investors $5.57 for each dollar of revenue as of this writing. Exactly none of that data points to a cheap stock.
I'm much more inclined to believe that BEA is worth half what it's trading for today. Here's why:
|
Metrics |
BEA |
Oracle |
|---|---|---|
|
Average revenue growth since 2004 |
10.3% |
22.5% |
|
Cost of $1 of revenue |
$5.57 |
$5.87 |
Since 2004, when Oracle began its current acquisitions spree, revenue has improved by an average of 22.5% a year. BEA has grown by less than half of that amount over the same period. Why are these stocks trading for similar multiples? BEA should be trading for less. A lot less.
Yet BEA's massive and rapidly growing maintenance revenue stream, estimated to be $715 million, would have value to any suitor, since most of what makes up the stream is high-margin and could thus be realized as free cash flow -- hence Oracle's $17-per-share bid.
But there's zero reason to go higher, Larry. If IBM plays into Icahn's hands with a competing bid, so be it. Walk away. You'd win just by forcing Big Blue to find a way to integrate WebLogic with WebSphere, IBM's most important software for managing the billion-dollar service engagements it craves. The very thought must give CEO Sam Palmisano nightmares.
As for Cisco, Sun, and Software AG, let them bid for BEA, too. Cisco has the cash but not the expertise. Sun has the expertise but lacks the cash. And the last time Software AG was relevant in the middleware market was during the Reagan administration. Well, OK, it's not that bad. But you have more to fear from SAP (NYSE:SAP) than you do from its German peer.
A bidding war for BEA? Whom are you kidding, Icahn?
