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Taking Stock: Thumbs Down On Oracle's PeopleSoft Bid
What gives? A financial guy not going along with a takeover play? I don't often come down on the side of less is more, but I will in the case of Oracle's proposed takeover of PeopleSoft. But first, let's look at factors in the deal's favor.
The economic benefits are obvious. The overlap of products would have huge cost savings to the combined company. Potentially, at least $500 million in sales and marketing costs would be eliminated if Oracle doesn't support PeopleSoft products. Redundant research and development costs would also go away. Cost savings of $500 million to $750 million per year could be realized. There's no doubt that a takeover would help Oracle's sluggish sales and get profits going over time. The move would also eliminate one of Oracle's biggest competitors and the associated competitive pricing pressures. Product pricing may improve in this environment. Boy, the deal looks great.
But wait--let's look at it from the customer's viewpoint. Organizationally, a merged Oracle and PeopleSoft is like mixing oil and water. Not surprisingly, given its human-resources software roots, PeopleSoft has always been thought of as one of the best companies to work for, sometimes at the expense of profitability. Its culture of customer orientation is well known to many IT managers.
And then there's Oracle's reputation. I'm not saying that Oracle doesn't care about its customers, but it can be very aggressive. This may be good for profits, but it wouldn't be good for PeopleSoft's customers. Let's just say that PeopleSoft's business culture would likely get lost in the combination.
Innovation is another area of concern. By losing one of its largest competitors, Oracle probably would spend less on R&D. This could result in less product innovation for customers.
Oracle would win in the near term. Whether or not the deal goes through, there will be major disruption to a business competitor--and oh, yes, the deal is scheduled to happen during the last few weeks of the second quarter, a critical time for a company with sales that are typically back-end loaded during the quarter. If that wasn't bad enough, SAP is likely to win, too, whether or not the deal goes through. If the merger occurs, SAP will benefit from the customers who don't want to work with Oracle and should find less competition in the middle market and application space. If the deal collapses, SAP will have taken advantage of the business disruption to both PeopleSoft and Oracle.
The $16 takeover price for each PeopleSoft share isn't unreasonable given its financials, though many investors feel the price will have to move upward to get the deal done, given the current price of $17.90. In 2003 and 2004, consensus earnings per share estimates are 51 cents and 59 cents, respectively. This places the 2003 and 2004 price-to-earnings ratios at 35.1 times and 30.3 times. Not exactly cheap, given Wall Street's growth forecast of 12%. The deal won't go down quietly. PeopleSoft management will likely fight it unless a substantially higher premium is offered. At the current price, I believe customers should hope the deal falls through.
William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]. Bay Isle has no affiliation with nor does it receive compensation from any of the companies mentioned. Bay Isle's current client portfolios may own publicly traded securities in one of more of these companies at any given time.
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