Oracle and BEA Systems Settle on a Price

Oracle Corporation yesterday announced it had finalized a deal to acquire BEA Systems, a key rival in the enterprise middleware industry. By strengthening its own Fusion middleware platform while simultaneously removing a challenger, Oracle will be better able to confront opponents like IBM and SAP, according to analysts.

The final cost of the buyout is $8.5 billion, which includes BEA's share value of $7.2 billion plus its cash on hand of $1.3 billion. Though larger than the initial bid of $6.7 billion, this acquisition is still the second largest in Oracle's history, behind its $10.3 billion purchase of PeopleSoft in 2005. The acquisition is expected to close in mid-2008, pending regulatory approval.

There was no shortage of commentary by industry watchers and financial analysts in the wake of the announcement; several respected sources had written statements ready to go when news hit the wire. "We think the deal makes sense from both a strategic and financial perspective," said Jason Maynard, senior software analyst for Credit Suisse, in a statement. "It further diversifies Oracle's business and strengthens its competitive position." Maynard further states that Oracle is likely being conservative about potential first-year returns (estimated at $0.01 to $0.02 in the first full year after deal closure). "We continue to think Oracle is the best positioned enterprise software company and the most capable of handling a potential slowdown in IT spending."

Other sources urged more circumspection. Oracle's long history of acquisitions has left it as custodian of diverse product families that need to be integrated to have the most customer value. "Oracle has leapfrogged its longstanding Oracle Portal product with a quite new and lightly implemented Oracle WebCenter, and now has acquired BEA--itself supporting two different portal products, after cancelling plans to merge them into a single platform," said Janus Boye, contributing analyst for CMS Watch, in a statement. "Upon concluding the takeover, Oracle will support four separate enterprise portal products that substantially overlap." Boye warns of a potentially "rocky ride" for Oracle and BEA customers over the next few years as Oracle sorts out its product roadmaps.

"Oracle's long term M&A strategy centers on gaining the biggest install base around not only mission critical applications, but also middleware," said Ray Wang, principal analyst with Forrester Research, in a statement. "At the end of the day, it's also about selling more database and gaining the largest share of the IT wallet." Wang expects to see "accelerated consolidation along key battle grounds of middleware platforms" such as master data management (MDM), business intelligence (BI), portals, business process management (BPM), and other related tools. "Don't expect the competitors of BEA to sit still."

Indeed, the deal isn't done yet, so it's possible that competitors could still disrupt the acquisition. "Other vendors like SAP, IBM, and HP need BEA more than Oracle does," Wang said. "SAP's NetWeaver is among the weakest of middleware platforms, despite one of the strongest ecosystems. IBM will be threatened by an Oracle dominance in middleware and continued challenge of commoditizing vertical service offerings into software solutions. HP could use this as an entry point to gain traction in the market."

Maynard was less concerned that competitors would cause problems in sealing the buyout. "We think the fact that the transaction is being done on friendly terms is definitely positive, and it should help expedite the closing of the deal," he said. "We think the proposed transaction will likely generate a second HSR request from the DOJ, however we do not think regulators will block the transaction due to antitrust issues given strong competitors such as IBM, SAP, and Microsoft."

SAP and Microsoft seem to be the vendors most at risk as far as analysts are concerned. "SAP of late has invested only minimally in its portal solution, which has fallen behind its peers functionally, even if it remains very much a 'known quantity' within the SAP customer base," Boye said. "Meanwhile, Microsoft SharePoint 2007 has changed very little in the past year, as customers and integrators alike continue to experiment broadly with the core platform in the absence of clear roadmap signals from Redmond."

Not everybody appears to think IBM and HP are threatened by the move, however. "Oracle will leverage its purchase of BEA to provide more pressure on IBM's middleware products in select vertical markets, such as telecommunications, but the purchase also provides the opportunity for IBM to highlight its applications-agnostic position," said Melissa Grady and Stuart Williams, analysts with Technology Business Research (TBR), in a statement. "Following the acquisition, TBR expects IBM will strengthen its partnerships with applications providers so as to cement its routes into the middleware markets."

Furthermore, "HP Services sustains a strong practice in BEA, with more than 1,000 trained engineers and 400 consultants, and HP has been expanding its Oracle middleware practice since the PeopleSoft acquisition in 2005," the TBR analysts add. "The combined practice makes HP Services one of Oracle's most strategic partners in the middleware market, and TBR believes the strong relationship is a boon to HP's growing Software division, which provisions a systems management portfolio that neatly wraps around the central Oracle software stack and ties the IT operations into business performance."

Cautions aside, the acquisition is being hailed as a win-win for Oracle and BEA. "From a competitive standpoint, we think this deal will materially improve Oracle's competitive position against IBM in the middleware/SOA space, and that it will further extend its leadership over SAP," Maynard said.

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