Why Oracle sweetened its bid for BEA

January 16, 2008, 8:55 PM UTC

Larry Ellison bullied and bluffed. But in the end, this software value meal proved too good to pass up.

A little more than a decade ago, fast-food giants realized they could get people to spend more by bundling burgers, fries and a drink together in a value meal.

Oracle CEO Larry Ellison finally got BEA — and another big opportunity to upsell corporate customers. Image: Oracle

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Today’s business software giants are catching on to the same thing. And that, more than anything, explains Oracle’s (ORCL) willingness to pay $8.5 billion for BEA Systems (BEAS) in what would be the third-largest software deal ever.

To understand what BEA brings to the table, let’s take the menu metaphor a little further. Oracle, helmed by deal making CEO Larry Ellison, already sells the industry’s most popular database. And with purchases like PeopleSoft and Siebel, Oracle has been beefing up its selection of applications businesses use to manage employee performance, business expenses, and other functions.

But to entice customers to do all their software shopping with Oracle, Ellison needs to create a full value meal. To achieve that, Oracle needs more of what BEA has.

“For Oracle, this deal is a very big step toward completing our vision of becoming a strategic enterprise software vendor of choice for our customers,” Ellison said. “We’ve demonstrated over many acquisitions that we’ve made the past three years how expanding like this benefits both our customers and our shareholders.”

The benefit that BEA brings Oracle is middleware. Middleware is the secret sauce that helps the jumble of corporate software programs work together, for example allowing a customer service system to access information from the billing program. In the age of the Internet, that kind of linkage is key as companies seek to build time-saving online experiences for their customers and employees.

Yes, Oracle has its own Fusion middleware — but BEA has a valuable base of customers, many of whom don’t already order most of their software from the Oracle menu. If Ellison can hold onto those customers while absorbing BEA and cutting costs, he can then upsell them into Oracle’s many other software offerings.

“Oracle is making a very profound statement here,” said John Senor, president of iWay Software, which does business with both Oracle and BEA. “By acquiring an independent with the installed base and reputation of BEA, Oracle is showing themselves to be very serious about being a large-scale enterprise infrastructure vendor. This is a very significant challenge to IBM (IBM), Microsoft (MSFT) and even SAP (SAP).”

It’s also the logical next step in a process Ellison has been talking about since the dot-com bust. Though he incorrectly predicted that Silicon Valley wouldn’t see another boom anytime soon — companies like Google (GOOG) and VMWare (VMW) have proven that the geeks still have plenty of fight left — Ellison was dead-on when he foretold the consolidation trend in enterprise software.

Business customers, Ellison has said, won’t want to visit dozens of different customers to cobble together their technology infrastructure. They’ll want one-stop shopping. Which means it’s time for the big guys to swallow the little guys.

With that air of bravado, Oracle has spent more than $25 billion over the last three years before bullying and bluffing its way into a $17 per share offer for BEA in October, which BEA management immediately dismissed as insultingly low. Ellison scoffed at BEA’s rejection, pretending he wouldn’t pay a penny more — he even said that after further studying BEA’s business, Oracle realized its initial $6.7 billion offer had been too high.

It was all bluster. Despite pressure from activist investor Carl Icahn, BEA CEO Alfred Chuang held out for more money. Good thing, too — though BEA’s board didn’t get the $21 per share it wanted, it got Ellison to sweeten the deal considerably. Oracle will pay $19.375 in cash, which is more than Wall Street seemed to think BEA would fetch even when investors assumed BEA would sell. Back in October at the height of Oracle buyout fever, the highest BEA traded was $18.94.

So now that Oracle has bagged BEA, what’s next for the rock-em, sock-em middleware market? In a recent research note, Jefferies & Co. analyst Katherine Egbert suggested that the big players might be circling Tibco Software (TIBX), the last big middleware player that hasn’t been snatched up.

Investors seem to agree that Tibco will soon be the side order in someone’s value meal. Tibco is relatively small pickings with a market cap under $1.5 billion, but it’s getting pricier by the minute: the stock climbed 11 percent on the news of BEA’s tie-up with Oracle, as investors speculated that a big player — maybe Hewlett-Packard (HPQ), IBM or Microsoft — will soon buy Tibco, too.