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Oracle Raises Stakes With BEA Offer

Oracle on Friday gave arch-rival SAP another reason for concern, making a $6.7 billion bid for embattled middleware software provider BEA Systems.

There's a very real possibility the bid may turn into a protracted hostile takeover, however. BEA's board of directors flatly rejected Oracle's $17-a-share offer, claiming the "unsolicited proposal significantly undervalues BEA Systems."

"BEA is worth substantially more to Oracle, to others and, importantly to our shareholders than the price indicated," William Klein, BEA's vice president of business planning and development, wrote in a rejection letter penned Thursday to Oracle President Charles Phillips made public later on Friday.

Oracle was quick to disagree.

Late Friday, Phillips replied with a letter of his own, insisting Oracle is sticking to its proposed $17-a-share offer and claims the company "remains available to discuss and complete a transaction quickly and efficiently."

Phillips claims BEA's management team agreed to meet with Oracle executives at 10 a.m. Pacific time Friday to "commence a process intended to result in the execution of definitive agreements before the open of business Monday, October 15. Unfortunately, BEA canceled the meeting late last night and declined our invitations to reschedule."

"In subsequent discussions with Bill (Klein) earlier (Friday), I asked whether there was any process that BEA would prefer to follow to move towards a friendly transaction and was told that BEA had no such process in mind."

Phillips went on to write that Oracle "remains committed to our proposed price of $17.00 per share, provided that the BEA Board and management team do not institute any measures which reduce the value of the company or shift value from BEA's shareholders to the management team."

"Our proposed price is a substantial premium to an already inflated stock price that reflected speculation of the potential sale of BEA and represents a more than 40 percent premium to BEA's stock price before the appearance of activist shareholders in mid-August of this year," the letter concluded.

While Oracle has a proven track record of not taking "no" for an answer, BEA's rejection, might be seen as opening the door for other suitors to join the fray, including SAP, IBM, HP or even a consortium of Chinese venture capitalists.

For Oracle, a completed deal would mean it would join IBM as a premier provider of middleware software used for service-oriented architectures (SOA)  in the enterprise.

But analysts on Friday said Oracle's $17-a-share, all-cash offer is less about interest in BEA Systems' product line than it is a reflection of Oracle's unwavering commitment to overtake competitor SAP in the enterprise application market.

"Oracle is not buying technology with this deal," Yefim Natis, a vice president and distinguished analyst at Gartner, said in an interview with InternetNews.com. "They have a large degree of overlap with BEA. What Oracle is buying is penetration into the middleware market and a significant amount of market share. They made this aggressive offer now to prevent someone else from jumping in. Now Oracle will become one of the two dominant players in the middleware space."

During the past three years, Oracle has spent more than $25 billion to acquire 30-plus software companies.

Though it had its eyes on BEA for years, the company finally pounced only after billionaire investor Carl Icahn last month increased his stake in the company to more than 13 percent of its outstanding shares. Icahn's move aimed to prompt BEA executives into selling the company to prospective buyers.

The news comes as SAP has begun to show interest in changing its strategy to better compete with Oracle.

After years of mocking its adversary's expensive acquisition spree, SAP on Monday executed an abrupt about-face, abandoning its own long-held strategy of focusing only on organic growth and small acquisitions. The company shelled out $6.8 billion to acquire Business Objects, a leading provider of business intelligence and analytics software.

Representatives at both SAP and BEA Systems were not immediately available to comment on Oracle's bid.

The $6.7 billion offer represents a 25 percent premium above BEA's Thursday closing price of $13.62 a share.

"We have made a serious proposal including a substantial premium for BEA," Oracle President Charles Phillips said in a statement announcing the offer, which it said it presented to BEA executives on Tuesday. "The proposal is a culmination of repeated conversations with BEA's management over the last several years. We look forward to completing a friendly transaction as soon as possible."

Not surprisingly, BEA Systems' stock price skyrocketed following the announcement -- at press time, up $4.53 a share, or 33 percent, to $18.15 a share. Since it's trading above Oracle's offer of $17 per share, some investors may believe SAP, IBM, HP or another dark horse suitor will make a counteroffer in the near future.

"We would not be surprised to see BEA become the object of a bidding war with potentially SAP and IBM being interested in the company, albeit for different reasons," Cowen & Co. analyst Peter Goldmacher wrote in research note following the announcement. "We believe the recent and public bid by Oracle was inspired by SAP's recent transition from an organic- to an acquisition-based growth company…It appears SAP is catching on to the benefits of Oracle's…strategy and Oracle's decision to buy BEA could be viewed as a defensive move to ensure that SAP doesn't get a foot in the door in the M&A game."

If BEA accepts the offer, the acquisition will mark Oracle's most significant acquisition since its hostile takeover of PeopleSoft in 2005. Along with fending off Oracle's advances in the past couple years, BEA has also been distracted by accounting missteps related to its handling of stock options grants and has missed several deadlines for filing its quarterly and annual financial reports.

"It's in the best interest of everyone involved for this to be a friendly and quick transaction," Gartner's Natis said. "Right now, this offer freezes the market for BEA. Who is going to buy anything from them right now? BEA needs to report their quarterly revenue and restore its ability to sell."

Oracle shares inched up 2 cents to $22.48 a share in early-afternoon trading.

Another independent middleware software vendor, Tibco Software, saw its shares climb to $8.62, up 87 cents a share or 11 percent, on speculation that it too could become an acquisition target for top-tier software vendor.