Five questions: Oracle's BEA buyout

Oracle launched and unsolicited $17 a share bid for middleware software maker BEA. BEA responded in a letter arguing that the company is undervalued. In the end, the deal will get done once the haggling ends. But in the meantime, there are a few unresolved questions.

Question 1: How telegraphed was this bid?

When Oracle executives mentioned the word "middleware" 18 times on its latest earnings conference call it was probably a decent hint that BEA was in play. Oracle CEO Larry Ellison sized up the market a few weeks ago:

Microsoft, with their middleware, a lot of which is embedded in Windows, Microsoft being the number 1 player, IBM being the number 2 player, and Oracle being the number 3 player in middleware. We passed all the other niche players. We really separated ourselves from the niche players. BEA, we’re almost twice as large as BEA right now, BEA is shrinking in terms of new license sales. So, it’s come down to the same big three, but we’re growing dramatically faster than our competitors and our target really is to beat IBM because it’s very difficult to measure the size of Microsoft’s middleware business because so much of it is embedded in Windows.

Notice Ellison's technique: Dismiss BEA and then buy the company. Based on this playbook other Ellison targets--Red Hat, any SaaS player and even SAP--could be acquisition targets.

Question 2: Does an Oracle-BEA deal point to an SAP and IBM merger?

Dana Gardner says the following:

And should Oracle succeed in acquiring and effectively absorbing BEA, the tectonic market shift may well push SAP into IBM’s arms. Yet even a deeper IBM-SAP alliance could only go so far, as IBM will continue to leap up the SOA value ladder to provide more applications services as composite and increasingly vertical business processes. Thus the biggest loser in the Oracle-BEA conglomeration is SAP.

Dana has a point and don't be surprised if IBM and SAP do merge at some point. Why? If Oracle buys BEA it's likely to trump IBM in middleware. Now IBM isn't going to make a big acquisition just to move up the market share standings. But SAP would provide some real synergy for IBM. You implement SAP, IBM pitches you middleware and then all the Big Blue consultants march in to help you with your processes, training and planning. There are crazier ideas.

Question 3: How will Microsoft react?

Dana also notes that Microsoft will be further isolated as it sticks to Windows in a loosely coupled world. That projection may be on target, but it's more likely that Microsoft will cook up a clearer open source strategy. Last week, at the Gartner confab in Orlando Ballmer hinted a bit that meshing Windows and open source software makes sense.

Question 4: Is BEA a big part of Oracle's Fusion strategy?

Oracle's Fusion strategy, which glues together all of the company's acquired software to create a path to new suites (if you choose to migrate at some point), largely depends on middleware. Oracle has middleware, but this deal make you wonder where BEA fits in with the Fusion strategy. Is BEA Oracle's Fusion strategy?

Question 5: Can BEA find another bidder?

This question is easy to answer: No. Merrill Lynch analyst Kash Rangan reckons that Oracle will spend up to $21 a share to do the BEA deal. But the $21 a share price is a hard stop for Oracle. At that price it's unlikely that other bidders such as HP and IBM will step up. For HP it makes more sense to let Oracle buy BEA and then be Oracle's preferred services partner. Meanwhile, Oracle can get the most out of BEA because Ellison and the gang get yet another large installed base to cross sell.