Oracle, the world's No. 2 software maker, said on Friday it offered to buy rival PeopleSoft for $5.1 billion, a move designed to bolster its flagging position in business software programs. The deal signals the growing readiness by software executives to consolidate the struggling sector as corporate spending on technology has waned amid the slumping economy.
Oracle said it would bypass management and go directly to shareholders on Monday with a cash offer of $16 a share, a 6 percent premium over PeopleSoft's closing price of $15.11 in Thursday's Nasdaq trading.
PeopleSoft shares rose 22 percent to $18.56 in early trading. Oracle shares were down 2.7 percent to $13. Oracle is the world's largest maker of database software that companies use to store and organize business data, but has struggled to make a name for itself in the business software applications market that run human resources, manufacturing and other functions. An acquisition of PeopleSoft would strengthen Oracle's position to take on the software applications market leader, Germany's SAP. Oracle said it would support PeopleSoft upgrades but did not plan to sell its software to new customers.
"The only way that Oracle's going to be a player in applications is to buy someone," said Bruce Richardson, an analyst with software research firm AMR Research. "I think it's a smart move. It's just surprising because Oracle has never done anything like this on such a large scale." Oracle Chairman Larry Ellison said on a conference call with analysts that PeopleSoft Chief Executive Craig Conway had approached him a year ago with the idea of combining the two companies' business application units, but that they could not agree on a structure.
Oracle said Ellison has submitted a letter to PeopleSoft's board in which he expressed a desire to discuss the offer. The offer follows PeopleSoft's announcement on Monday that it would buy J.D. Edwards & Co. for $1.6 billion in stock in a deal that would vault PeopleSoft ahead of Oracle in terms of market share for software applications, although it would still lag SAP. Oracle said that if its bid for PeopleSoft is successful, it would review whether it would support the proposed acquisition of J.D. Edwards.
Richardson said Oracle would need to be prepared to raise its bid above $16 if it wants to convince PeopleSoft shareholders. "The question is whether Larry (Ellison) is willing to go to $20 or $25 a share, if that's what it takes," he said.
Ellison said on the conference call that $16 was a fair price. He characterized PeopleSoft's deal with J.D. Edwards as risky for investors and said agreeing to Oracle's offer would be the safer route. Still, Ellison said he was "very interested" and would keep options open on J.D. Edwards.
Oracle, which is being advised by and provided with bridge financing from Credit Suisse First Boston, expects a deal to close in July.
Oracle Chief Financial Officer Jeff Henley said the proposed acquisition would increase the combined company's earnings from its first quarter.
Oracle's acquisition of PeopleSoft would be subject to regulatory approval and the amendment of PeopleSoft's shareholder rights plan. It would not be subject to due diligence or financing. Oracle said it expects its fourth quarter earnings to be in a range of 14 cents to 15 cents a share. The average Wall Street estimate was 14 cents a share, with a range of 12 cents to 15 cents a share, as compiled by Reuters Research. A year ago, the company posted a profit of 12 cents a share. Excluding a one-time charge, that profit totaled 14 cents a share.
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