Clearly, the price was much negotiated.
If you look at BEA's financials, you would see BEA has actually been going sideways for many years now. License revenues are going down, services subscriptions are the lions share of total revenue. With rare exceptions, BEA has mostly failed to create successful new products to augment/replace their mature cash/cow products like WebLogic Server and Tuxedo. There are a variety of reasons that new products haven't succeeded, but Oracle's management style will definitely fix those, one way or another. In the mean time, Oracle is thriving, to say the least, but Oracle has long since reached the point of requiring huge acquisitions to grow...once you are as big as Oracle, organic growth is simply too slow to meet investor demands.
One of BEA's assets is a huge and highly profitable services revenue base. Larry Ellison has been quite clear that Oracle's growth strategy was to build highly profitable services. Larry even told the Financial Times a while back that Oracle was going to convert to a 100% services (read subscription) business model, just as other software behemoths (see recent Microsoft announcements) are doing. The addition of almost a billion dollars of very profitable services revenue goes almost straight to Oracles bottom line.
BEA's end was sealed back when Carl Ichan took a 14% ownership position (a lot of it through options between $7-8) last summer and fall. Carl is famous for seeing latent high value and making something happen...BEA is merely one of his many successes.
The clumsy courtship between Oracle and BEA Systems is over. Oracle said Wednesday that it will acquire BEA for $19.375 a share in cash.
The offer puts the value of BEA at roughly $8.5 billion.
On a conference call–where Oracle wasn’t taking questions–Oracle CEO Larry Ellison said the deal will offer “greater value to our customers than any other offering in the marketplace.” He named IBM, Microsoft and open source rivals as the competition.
Ellison added that BEA will allow Oracle to instantly become a leader in messaging and “adds scale to our middleware business.” Ellison also said the BEA deal will accelerate adoption of service oriented architecture (SOA) and help Oracle in key verticals such as telecommunications. Another plus: Oracle will acquire BEA’s sales force and technical talent.
“Simply stated this combination with BEA gets us where we need to be,” said Ellison. “Most of BEA’s customers are already Oracle customers.”
BEA CEO Alfred Chuang said the all-cash deal was good for customers because “our two businesses are a natural fit.” Chuang said the two companies would work on a “comprehensive integration plan” for customers and employees.
It was a strange courtship to say the least. Oracle offered $17 a share for BEA in early October. Then the fun began with a series of letters saying the other party was out of its mind. BEA maintained that it was worth $21 a share. Oracle said BEA was crazy. In December, Oracle said it closed the book on chasing BEA, a statement that must have scared BEA management since no one else wanted to buy the company despite decent earnings.
And here we are. Oracle gets its prize and says BEA will add 1 to 2 cents a share to earnings after the deal closes. Can you imagine the negotiations that made Oracle arrive at a goofy price like $19.375?
- BEA: I want $20.
- Oracle: No way. You’re going to get creamed in a downturn.
- BEA: OK, $19.375 is my price.
For Oracle, the BEA deal makes a lot of sense. Oracle gets to extend its Fusion middleware strategy. In a statement, Ellison said:
“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.”
For Chuang the moment is bittersweet.
“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.”
Translation: Chuang is likely to be gone after 13 years at BEA.
The deal is expected to close in mid-2008.
