BEA Systems Finally Says Yes to an Oracle Buy

Published: January 21, 2008

by Timothy Prickett Morgan

Smaller or beleaguered software companies of all kinds and stripes are coming in from the rain like drenched animals into a warm barn with the economy in the United States still wobbly. In a maturing market, as that for information technology certainly is, consolidation is the inevitable consequence of the maturity of a product, and this process gets accelerated when smart companies think they can't go it alone any more. Such is the case with middleware software maker BEA Systems, which last week accepted a takeover offer of $8.5 billion from database and application software giant Oracle.

Oracle has been chasing BEA for some time in an effort to enhance its Fusion line of middleware and to prevent the well-regarded and popular BEA WebLogic and AppLogic middleware and Tuxedo transaction monitor software from falling into enemy hands. Vulture capitalist Carl Icahn, who has been increasing his stake in BEA and pressuring the company to sell itself, has given a nod to the offer that Oracle has put on the table. Last year, Oracle had proposed acquiring BEA for $6.7 billion, or $17 per share, and the BEA board of directors rejected the offer, saying that the company was worth at least $21 a share, or $8.3 billion. And here we are, only a few months later, and Oracle is shelling out even more cash to get the deal done.

It has become clear since the original $6.7 billion offer expired in October 2007 that no one else was going to make any offer for BEA--although the company is a natural fit for Hewlett-Packard or Sun Microsystems and their respectively large aspirations in the software market. Sun doesn't have the cash to do such a deal, or the face to admit that its Java Enterprise System is not anything near as good a revenue generator as BEA's products. And HP has spent a lot of cash on other acquisitions and has already gotten out of the middleware business once. (Remember Bluestone Software?) However the deal got done--Icahn arm wrestling Oracle chief executive officer and co-founder, Larry Ellison, perhaps--it got done and now BEA is recommending to shareholders to take the deal.

"Over the past several months, our board of directors, with the assistance of independent financial and legal advisors, has reviewed various ways to maximize stockholder value, including engaging in discussions with third parties about a possible sale of the company," explained Alfred Chuang, BEA's chief executive officer and chairman in a statement. "This transaction is the culmination of that diligent and thoughtful process, and we believe it is in the best interests of our shareholders. I am confident our innovative products, talented employees and worldwide customer base will be key contributors to the success of the combined company over the long term. We look forward to working with Oracle toward a successful completion of the transaction."

Oracle is saying that the modular nature of its Fusion middleware will allow it to plug in BEA software, but what Oracle is really after is a maintenance revenue stream, a customer base in which to cross sell databases and applications, and keeping BEA out of the hands of other players who could give its Fusion middleware some trouble in the market. But the ability to snap BEA code into Fusion will be a key aspect of this merger nonetheless.

"The addition of BEA products and technology will significantly enhance and extend Oracle's Fusion middleware software suite," said Oracle's Ellison in the same statement. "Oracle Fusion middleware has an open "hot-pluggable" architecture that allows customers the option of coupling BEA's WebLogic Java Server to virtually all the components of the Fusion software suite. That's just one example of how customers can choose among Oracle and BEA middleware products, knowing that those products will gracefully interoperate and be supported for years to come."

It seems highly unlikely that anyone else will swoop in and try to snatch BEA away from Oracle's jaws. But you can sure bet that Icahn and other investors with stakes both big and small would love nothing better than for someone to step up to the plate. IBM, with $16 billion in cash, and HP, with $11.4 billon in cash, could do the trick.

Oracle, by the way, is really only paying $7.2 billion in cash for BEA, since the acquired company has $1.3 billion in cash of its own in the bank.

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