Following up on its earlier but rejected buyout offer, enterprise and database application provider Oracle Corp. today announced that it would buy middleware vendor BEA Systems for $8.5 billion in cash.
The agreement comes three months after BEA rejected Oracle's initial offer of $6.66 billion. The October proposal valued BEA at $17 per share, a 25% premium on its $13.62 stock price at the time. Today's offer, which still must meet the approval of BEA's shareholders, raises the per-share price tag to $19.38 — 14% higher than the initial bid.
In the wake of the first rebuff, few observers doubted that Oracle — and its tenacious CEO, Larry Ellison — would demure. Many cited hard-fought acquisition negotiations from Oracle's past, including its 2005 takeover of Siebel Systems and its 2004 buyout of PeopleSoft, saying that Ellison, once sold on a strategy, rarely abandons it.
The move to purchase BEA fills out the middleware tier of Oracle's product portfolio, which also includes applications and database technology.
Founded in 1995, BEA is a pioneer in middleware technology, which helps companies create more efficient processes by stringing together software and database systems that otherwise could not communicate. As the world of IT has grown in recent decades, new vendors have emerged to automate traditionally manual processes. In most companies, that has created a potpourri of IT systems that need to interact. Products such as BEA's WebLogic and Oracle's Fusion Middleware help connect those systems so that businesses can mine the synergies among them.
On a brief conference call this morning to announce the pact, Ellison called the marriage an "exceptionally strategic fit," saying, "one of the things that attracted us to BEA is that its product lines and vertical solutions are overwhelming complementary to our Fusion Middleware products."
Analysts who spoke to Managing Automation painted a different picture today, citing significant product overlap and saying the deal is more about Oracle's desire to improve its market position against its main middleware competitor, IBM, by taking over BEA's position in the market.
"The combination of Oracle and BEA, from a revenue perspective, would propel Oracle to the second position in ... the portal, process, and middleware market after IBM," said Massimo Pezzini, a distinguished analyst at research firm Gartner Inc.
In fact, in certain segments of that market, the deal could vault Oracle into the lead, Pezzini said, including in offerings for business process management, enterprise service bus, and SOA governance. That, coupled with the substantial partner ecosystem BEA has developed over the years, likely drew Oracle's interest, he said.
Ian Finley, a research director at AMR Research, agreed, noting that far from being complementary, the two product sets show substantial overlap.
"If you look at the core Fusion Middleware product set and you lay it on top of [BEA's], there's almost 100% overlap between those two areas," Finley told Managing Automation.
The BEA deal bears some resemblance to Oracle's PeopleSoft acquisition more than three years ago, according to Finley, who points to a similar overlap in technology and customer base in that deal.
"They learned a lot of lessons from the PeopleSoft acquisition, one of which is you can't say you're going to kill the acquired product." Finley said it took Oracle a year or so following the PeopleSoft takeover to learn that lesson, but that it eventually stuck.
Ellison confirmed as much on today's conference call.
"Oracle Fusion Middleware will continue to be the center of our current and future middleware and applications strategy, [but] WebLogic and other BEA technologies will be an increasingly important part of our offering going forward," he said in prepared remarks.
"Customers can continue to use their existing BEA products," he said, "or customers can choose to move to Fusion Middleware as it continues to evolve and incorporate the best features of both companies' products. Either way, it's at the customer's choice."
Finley predicted a strengthening of BEA's R&D efforts under Oracle's purview, and said the two product sets will come together in time. "It will eventually be a superset of what you had in the Oracle product and what you had in the BEA product."
The deal, if it goes through, will alter the competitive landscape in the middleware market. Finley echoed Pezzini's belief that Oracle targeted BEA — and not one of the other independent middleware vendors, including Tibco, Progress Software, and Software AG — because BEA has the largest installed base, with 15,000 customers. Adding that roster to Oracle's would give it a compelling argument as it battles IBM in the middleware market, Finley said.
"That, for Oracle, has always been their emphasis — if they can, by acquisition or by organic growth, they want to be number one in every sector they play in," Finley said.
Pezzini said Oracle's purchase of BEA would give those second-tier middleware vendors a short-term boost. As the deal goes through the customary approval process, customers may want avoid the uncertainty of selecting either a BEA or an Oracle product. "Going forward, of course, it's going to be harder and harder to compete against two big giants such as Oracle and IBM," he noted.
In addition to IBM, with its WebSphere offering, Oracle's top-tier competitors include SAP, with its NetWeaver technology, and, to a lesser extent, Microsoft, which offers similar integration technology that operates on its own .NET platform instead of the open-standard Java language.
SAP's push into the middleware terrain is hindered by two factors, according to Finley. One is that the functionality of the NetWeaver technology is not yet as mature as IBM's, Oracle's, or BEA's. SAP should be able to address that disparity soon enough, however.
"Our thinking is that within a year or two, all of the major vendors will have largely the same functionality," Finley said.
The greater inhibiting factor, he said, is the lack of a dedicated sales model. "SAP basically doesn't have a channel to sell [NetWeaver] as an independent application," Finley noted. "If you think about it, IBM, BEA, Oracle — they all have a direct sales force that goes out and sells directly to IT, and just sells them IT tools."
Pezzini said the BEA purchase might give Oracle a slight opening into the shared BEA/SAP customer base, but that wouldn't amount to a substantial bite out of SAP's business.
Oracle will finance its acquisition of BEA through cash and "readily available" short-term credit, according to Ellison, who noted that at the end of its most recent quarter Oracle had $8.4 billion in cash and marketable securities. BEA itself has cash reserves of $1.3 billion, making the net cost of the deal $7.2 billion.
Ellison said that he expects the deal to close by October 2008, and that it should be accretive by $.01 to $.02 to earnings within a year of its completion. Oracle executives were not available for further comment today.