BEA: Will anyone start a bidding war with Larry Ellison?

October 15, 2007, 1:25 PM UTC
Oracle CEO Larry Ellison has emerged as perhaps the industry’s top merger mastermind.

You’d think Oracle (ORCL) CEO Larry Ellison makes crystal balls, not databases. Four years ago, the tycoon boldly declared that the business software market was on the brink of a buyout spree, and only a few mega-companies would survive.

Many wrote off that prophecy as mere bravado, but today things are happening just as Ellison predicted. And he’s not just sitting back and watching the action. Last week Oracle went public with its unsolicited $6.66 billion cash bid for rival BEA Systems (BEAS).

Ellison’s move will have a lasting impact because it is forcing competitors such as IBM (IBM), SAP (SAP) and Hewlett-Packard (HPQ) to consider making their own high-stakes bids for San Jose-based BEA, if only to keep its valuable customers out of Ellison’s hands. But outbidding Oracle also could be dangerous for them – a few industry watchers are whispering that Ellison might be happy if a rival gets stuck managing a time-consuming acquisition. (On Monday morning, Bloomberg reported that a spokesman says SAP won’t bid for BEA.)

Whatever Oracle’s motive, Wall Street welcomes its aggression. “The market’s licking its chops, man; this is getting fun,” said Peter Goldmacher, analyst at Cowen and Company. “Larry sees around corners. He saw this coming and he drew first blood. He said, ‘I’m going to do it first, I’m going to do all the best deals, and I’m going to leave the scraps for everyone else.’”

Why all the fuss about obscure software? Though it’s not as sexy as iPods and cell phones, business software has become an essential part of running a company in the Internet age. Products from Oracle and others hold data about a company’s customers, suppliers and employees – and practically every large company spends millions of dollars annually on related upgrades and service contracts. The right software can help a company more quickly identify potential cost savings or sales opportunities, potentially delivering a competitive edge.

In this environment, the largest software companies are vying to become one-stop shops where businesses can go for all of their software needs. That’s what makes BEA attractive – though it’s just a fraction of Oracle’s size, BEA is the second-largest provider of “middleware,” a type of software that helps businesses get more use out of their data. Oracle is the third-largest middleware provider.

For now, things seem to be playing into Ellison’s hands. Rival SAP, which once panned Oracle’s strategy of growth by large acquisitions, just a few days ago said it would buy Business Objects (BOBJ) for $6.8 billion. That means SAP is trying to play Oracle’s game – and it’s not clear how well the company will do. As Bernstein Research analyst Charles Di Bona said in a note last week, while Oracle’s management team has “proven itself adept” at pulling off big mergers, “the SAP team is as yet untested in that area.”

What’s next? Over the next month or so, the industry will be on the lookout for a bid for BEA that rivals Oracle’s. If none surfaces, it will be tough for the company to avoid becoming Ellison’s latest meal. (BEA will have plenty of help looking for alternatives. Activist investor Carl Icahn, who has been using his 13.2 percent stake in BEA to push for a sale, has agreed with BEA’s board of directors that Oracle’s bid is too low, and sent a letter Friday encouraging the company to find a sweeter deal.)

Don’t be surprised if competitive bids don’t surface immediately. Oracle’s current offer of $6.66 billion is not only a 25 percent premium over BEA’s closing stock price Thursday, it’s high enough to make this one of the top-five software acquisitions of all time.

That sort of deal may prove too rich to do on a whim.