SAP versus Oracle

I'm going to channel my inner IT nerd today.

The German software giant SAP AG and the US/California based Oracle are competitors on a range of products, but none more intensely so that in ERP, (or, for the uninitiated, Enterprise Resource Planning). The Californians have a better name, in that it evokes the image I have displayed here. The word "sap" evokes an image in English too, but I don't think its something the Germans were going for.

Here's a link to a general commentary on the rivalry from back in 2006, and here is something more recent.

SAP's original business plan was to conquer the then-new ERP market, whereas Oracle seems to have bumbled into the field half by accident, through a series of acquisitions. They are an aggressive second-place runner, like "Avis" back in the day when there were only two rental car companies that counted, and Avis used to advertise: "We're number two. We try harder."

Here's a link to an issue of InfoWorld from August 1998, those golden days of the dotcom madness. Look at the column on the left, "ERP & Services Briefs." SAP's ERP suite was dominant, and other software companies were working to integrate with it in offering related services. But (says the second graf of that column): "versions for other ERP suites, such as Baan and Oracle, are in the works."

Oracle, as I've noted, has since made a big splash in this pond. What happened to Baan? That is a fairly tangled story, worth a separate entry.

So: what's my point? Only the old one that competition is good, even if it is only a duopoly. Keep it up, guys!

Oracle to Buy BEA

The price works out to $19.375 per share.

So BEA's management, by holding out and demanding $21 when the subject first arose, in October, has done something positive for its shareholders. Oracle was at first offering only $17 a share, remember.

It looked at first as if BEA's management was going to face a proxy battle from a malcontented Carl Icahn. But they seem to have brought him on board successfully, and he'll reap his share of the control premium Oracle's paying.

It's nice to report that everybody is happy, isn't it?

Of course, Oracle's shareholders might not be entirely thrilled. The general rule is that after such an announcement, the market price of the target rises, and that of the acquirer falls.

Just before the original $17 offer, the market value of BEA shares was about $14. The market, presumably anticipating that there would be other bids, immediately brought that value up above $18 on the first offer, then it began to lose ground as the target resisted.

BEA's value fell below $14.75 last week, but recovered in the last three trading days, even though the broader market was taking a beating. Hmmm. Evidence word of a deal was leaking out? You didn't hear it from me. Anyway, at close of Nasdaq's business yesterday it was at $15.58.

This morning it'll presumably head up toward the value stipulated in the announcement. I'm guessing it won't quite get there, i.e. that there will be a discount allowing for the possibility that the deal will do awry between announcement and closing.

I'll next post here on Sunday. Perhaps that will be a good time to address the broad issue of insider trading in advance of such announcements.

POSTSCRIPT: I was right, above, to draw the inference that Icahn is on board with this deal. In was only an indirect inference when I wrote it, but after I had posted these thoughts, I learned of an explicit statement Mr. Icahn put out this morning: "This transaction is an excellent example of the great results that can be achieved for all constituencies when the shareholder activist is able to work cooperatively with management."

Miscellaneous News

Three things today:

1) Icahn has reached a confidentiality agreement with BEA Systems Inc. I wrote about BEA and its rebuff of Oracle in the waningdays of October. Management apparently hopes to persuade him that they are in the right in insisting that they won't sell control for anything less than $21 a share, and they'll share confidential material with him in order to pull off this feat of persuasion.

2) AIG reported its third-quarter operating profit Wednesday: and the news was bad. The third-quarter operating profit fell by 13% percent, or 27 cents a share below analysts' estimates.

In a conference call the following day, AIG honchos warned that revenue in some parts of the company probably wouldn't improve in 2008.

It warned in a conference call on Thursday that revenue in some parts of the company, such as the mortgage insurance unit, probably would not improve in 2008.

This has had the predictable effect upon AIG's stock price and may well lead stockholders to look kindly upon whatever Greenberg is cooking up.

3) By the way, I'd like to say a big "hello" to anyone who is reading this from Labaton Sucharow LLP, a prominent securities-litigation law firm. Labaton reprsents the Ohio Public Employees Retirement System, which is lead plaintiff in a lawsuit against AIG and Greenberg for their use of sham reinsurance agreements that made the books look unrealistically favorable and allegedly induced pension fund executives to buy and/or hold the stock when they wouldn't have otherwise.

I infer that somebody at Labaton has the job of periodically googling the name "Hank Greenberg" and writing a report on what he finds. In that case, he's reading this, too. Welcome.

Synergies

That's one of the great buzz-words of business. Synergies. Every merger is justified by the "synergies" it will create.

Way back in the 1970s, the golden age of conglomerate creation, no one bothered with this claim. There was a prevailing idea that a large corporation should be a balanced portfolio all by itself, so that the simple unrelatedness of the businesses brought under a single corporate roof was enough justification for the deals.

But then, that was the era of the Warren Court, and the early years of the Burger Court. Antitrust law seemed to make almost any combination between two businesses that weren't utterly unrelated the object of suspicion.

The judicial and political climate is quite different now. Companies claim synergy for their mergers both because "conglomerates" got a bad reputation back in the old days and because they now feel confident that they can claim synergy without bringing down on their heads adverse consequences.

This all brings us back to BEA Systems and Oracle. They're both software companies. They are even direct competitors in some parts of the vast category of product. Still, in a software world dominated by Microsoft, one can make a case that smaller players need to combine -- that this is pro-competitive -- because the process may creates an effective competitor, a counter-balance to that Big Kahuna.

Oracle's CEO Larry Ellison almost said this (not in terms of public policy, of course, but in terms of his own vision of the market's future} in a conference call in late August.

"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."

He stoops to conquer. You'll notice that he was recently belittling that "shrinking" company he more recently has sought to buy. Not shrinking so fast as to have nothing to offer, I guess.

Contemplate the activities of belittlement on the one hand and attempted ingestion on the other. Do those activities display any (what's the word I want here?): synergy?

The Usual Arguments

There are some standard arguments that an incumbent management of a target company typically makes when a potential acquirer offers an above-market price for a controlling share of a its stock.

So, yes, the offer is for $17 a share and the stock was selling for $14 a share before the offer was made but stockholders should support our refusal to do the deal because:

1) we are working on a strategic plan that will in time have the price at or above $21., the disruption of a change in ownership will only block that plan
2) the offer isn't reliably financed, so the offering price is illusory
3) the buyers don't know how to run a company of this sort, so they'll destroy its value soon after they take over
4) the control premium they offer is too low, we can get better from another buyer.

Note that although arguments (1) - (3) can be employed to defend the continued independence of a company, argument (4) effectively concedes the need for consolidation.

In the case of BEA Systems, their rather terse public statements have suggested (1). The issue of financing hasn't arisen.

Clearly, in this case, classic argument (3) won't fly. The bidder is Oracle, after all. They are running a business of just the same sort as BEA.

Finally, (4) might avail against Oracle, but doesn't work as against Icahn's dissatisfaction. Icahn is calling, precisely, for BEA to hold an auction -- if it can get better than the $21 Oracle is offering, he'd presumably be happy to see it do so.

Carl Icahn Helps Us Get Started

Carl Icahn wants BEA Systems to auction itself off.

BEA, a company founded in 1995 and headquartered in San Jose, Calif., sells software: largely to financial-services companies, although its products have other outlets as well.

Oracle wants to buy it. Not the software, the company. But BEA's management has allowed the deadline to lapse on Oracle's bid, ticking off Icahn, who doesn't think the stock is worth as much under current management as Oracle is offering. This is a classic set-up for a proxy fight, and Icahn is a grizzled veteran of the game.

This is also a good excuse for us to work through some terminology. Though sometimes used loosely, the words "takeover" and "merger" have in their strict use quite distinct meanings. A merger is the mutual decision by two companies to combine -- it involves a vote by both sets of shareholders. A takeover, on the other hand, is the buy-up of the shares of one company in the market by another.

A takeover can be either friendly or hostile. In the case of a hostile takeover, there are various defenses an incumbent board might put in place to limit a buyers' ability to attain a controlling share of the compnay equity -- we'll likely have a chance to discuss them if I continue writing this blog for any length of time.

But of course the chief reason for an acquirer to try to work within the corporate structure of its target and accomplish a merger is that going the takeover route can be tricky and costly if the target resists effectively.

What Oracle proposed was a merger. It's offering $17 a share, but the management of BEA has taken the position that this isn't enough. It wants a minimum of $21.

That seems quite a brassy demand, since BEA's stock was trading at about $14 in early October. It rose above $18 briefly after Oracle made this offer. In effect, investors bid it up to that level in the expectation that the $17 offer was just an opener, and that Oracle would sweeten it a bit. But as management's hostility to a deal became clear, the price sank below the $17 offering level, and closed Friday at $16.50.

Why do the BEA honchos think their firm is worth $21 a share? or are they just pretending to think so? We'll get to this tomorrow. Feel free to post your comments and tell me I'm an idiot if I'm getting any of this wrong. It's the only way I'll learn.