Subject:  Oracle Defends PeopleSoft Bid; Analysts Say It's Too Low |
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Date Posted: 16:50:45 06/09/03 Mon
Oracle Defends PeopleSoft Bid; Analysts Say It's Too Low
Monday, June 9, 2003 06:28 PM ET Printer-friendly version
NEW YORK (Dow Jones)--Oracle Corp. (ORCL, news) defended its $16-a-share offer for PeopleSoft Inc. (PSFT, news), which it officially launched Monday, even though most observers said the software company needs to raise its hostile bid to succeed.
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Oracle surprised investors and its rivals Friday with a $5.1 billion takeover proposal, offering a 6% premium to PeopleSoft's closing price on Thursday.
PeopleSoft shares soared on the news, quickly eclipsing the $16 level, as investors speculated Oracle would sweeten its bid. The stock ended Monday's session up 8 cents to $17.90, or about 12% above the offer price.
Investors are unlikely to tender their shares as long as the market price remains above Oracle's offer. Several analysts said Oracle could afford to pay more than $20 a share for PeopleSoft and still make money on the transaction, since Oracle plans to slash most of its rival's expenses.
Charles Phillips, an executive vice president at Oracle, defended the $16-a- share price tag, saying PeopleSoft shares could drift lower in coming weeks. He declined to say whether Oracle is willing to raise its bid.
"The price that we offered is a very fair one," Phillips, a former Morgan Stanley analyst, told reporters on a teleconference Monday. "As time goes on, investors will start to think maybe this is the best route for PeopleSoft."
Oracle's hostile offer came four days after PeopleSoft said it would buy fellow software maker J.D. Edwards & Co. (JDEC, news) for stock initially worth $1.7 billion. Both Oracle and PeopleSoft are trying to add enough customers to compete with market leader SAP AG (SAP, news).
Phillips said Oracle is paying about $621,000 per PeopleSoft customer. By comparison, he said PeopleSoft is paying $257,000 per J.D. Edwards customer. "We think we are paying a premium," he added.
Nonetheless, investors and analysts said Oracle will have to sweeten its bid to win the support of PeopleSoft's management and a majority of its shareholders.
PeopleSoft's board, chaired by the company's founder and large shareholder Dave Duffield, has 10 business days to officially respond to Oracle's offer, which was filed on Monday. A company spokesman had no immediate comment.
The chief executive of J.D. Edwards said Monday that an Oracle takeover of PeopleSoft would raise "serious antitrust problems" and would likely be blocked by regulators.
But Oracle EVP Phillips said the combination wouldn't raise antitrust issues because the software industry is fragmented and the combined entity would still be smaller than SAP.
Both Oracle and PeopleSoft have been losing market share to their German rival in recent years. "You could argue we need more (consolidation), it's not enough to slow SAP down," Phillips said.
Oracle, which has about $6.1 billion in cash and investments, has the war chest it would need for a protracted takeover battle. It has secured a $5 billion credit line from Credit Suisse First Boston, according to documents filed with the Securities & Exchange Commission on Monday.
"Capital is not a constraint," said Brad Reback, a software analyst at CIBC World Markets. "The $5 billion (credit line) only further validates the seriousness of this deal."
CIBC rates both Oracle and PeopleSoft at market perform and Reback and his colleagues don't own shares in either company.
Since PeopleSoft has about $1.9 billion in cash and investments, Oracle's net cash payout is about $3.1 billion.
Oracle plans to stop selling PeopleSoft products and lay off a large number of its employees. It stands to lose a significant portion of PeopleSoft's revenue but it would also shed most of the company's operating costs.
The Redwood Shores, Calif., company is most interested in PeopleSoft's software maintenance and services contracts, which analysts estimate generated about $800 million in revenue last year. Oracle would take over these contracts and slowly switch PeopleSoft customers to Oracle software.
"Our analysis of PeopleSoft's services income suggests positive return on debt capital for Oracle and indicates there is room for Oracle to raise its bid to the mid $20s, if necessary," wrote Drew Brosseau, an analyst at SG Cowen, in a research note. He rates Oracle at market perform and doesn't own the stock.
Oracle's $16-a-share offer officially expires on July 7, but the company said in its SEC documents that it will likely extend the offer period.
-By Marcelo Prince; Dow Jones Newswires; 201-938-5244; marcelo.prince@ dowjones.com
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