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| Home - Software M&A Review - Jun 03 Issue |
Software M&A - All Hell Breaks Loose |
By Ken Bender, Managing Director, and Allen Cinzori, Associate - Software Equity Group, LLC
Oracle’s hostile bid for Peoplesoft is not your average takeover. Beyond the usual drama of bid, rejection and rebid, there’s something else playing out here. It causes many of us to feel conflicted. On the one hand, we respect success and value a free economy where market forces and the survival of the fittest rule. But on the other hand, we root for the underdog, the proud little guy who fights hard and keeps the bully at bay. Terminator vs. Harry Potter. And therein lies our dilemma.
The ordinary merger or acquisition, where a larger company acquires a smaller company which reluctantly, or sometimes gladly, acquiesces, poses no problem for most of us. It’s a classic example of market forces at work. The buyer sees some sort of synergy, and though the acquired entity will slip quietly into the night, its products will usually survive, its customers will be served, and most of its employees will be retained. Even when that’s not the case, such as an asset sale of a once proud, fallen company, we can justify a company’s demise based on its poor planning or execution.
But when the takeover is hostile, when the target is highly respected and the attacker is feared and disliked, our usual market homilies are of little comfort. It’s not just the greed – we’ve grown used to that – it’s the plunder and pillage that offends us most. The little guy (with only $1.9Billion in revenue) is beaten mercilessly by the bully because he got just a little too big for his britches. His far better products will be discontinued. His customers will face huge uncertainty and a potential loss of billions previously invested. Thousands of his talented employees face job loss in the near term. This begins to feel less like a free market at work and much more like Attila the Hun.
If Mr. Ellison has his way, an oligopoly of Oracle, SAP and Microsoft will divvy up the huge market for enterprise software. It worked for the oil industry, why not software? Giant oil companies justified there mergers on the basis the oil industry was mature and economies of scale were essential to compete in the global economy. Such factors hardly apply here. Does anyone believe Oracle will produce better software, or cheaper software, by taking out Peoplesoft? Does anyone really doubt enterprise software will rebound? The Fortune 1000 will, once again, seek competitive advantage through the innovative use of technology, and the software industry will respond. Except one of its most successful and talented players won’t be there to innovate as it has in the past.
And finally, at the risk of opening Pandora’s Box, isn’t time to talk about whether we’re applying the correct criteria to assess hostile takeovers? Are the only valid yardsticks whether the combination complies with antitrust laws and provides fair value to the target’s shareholders? Do shareholders have a fiduciary obligation to their company’s customers who spent billions on the company’s products, presumably boosting the stock price and contributing to the premium? Is anything owed to the target’s employees, other than two weeks severance? Should it be so easy? Does morality have any place in this debate? Would you be offended by a brazen billionaire who bought and destroyed a half-dozen Cezanne paintings simply to boost the value of his less notable Cezanne? Perhaps it’s time to rethink our approach to hostile takeovers.
SOFTWARE M&A: A MONTH IN REVIEW
PeopleSoft (Nasdaq:PSFT) to acquire J.D. Edwards (Nasdaq:JDEC)
Category: Enterprise resource planning
Purchase Price: $1,350,000,000EV
Seller Revenue: $886,000,000
Revenue Multiple: 1.5x
Payment Terms: Cash & stock
SEG’s Perspective:
Kicking off what was a very exciting week for software M&A, PeopleSoft announced it will acquire J.D. Edwards. With Edwards, PeopleSoft will greatly strengthen its position in the mid-market, and its presence in manufacturing and other key vertical industries such as real estate and construction. Though Edwards’ revenue declined 11% from its 2000 high, it has done reasonably well in the current economy. We’re a bit surprised at the price, which equates to a modest 1.5x multiple and only a 19% premium to Edwards’ shareholders.
Oracle Corp. (Nasdaq:ORCL) to acquire PeopleSoft (Nasdaq:PSFT)
Category: Enterprise resource planning
Purchase Price: $3,170,000,000EV
Seller Revenue: $1,930,000,000
Revenue Multiple: 1.6x
Payment Terms: Cash
SEG’s Perspective:
Oracle responded promptly to the PeopleSoft/Edwards announcement by tendering a hostile bid for PeopleSoft in the amount of $5.1B, or $16 per share. Viewed by many as a grossly inadequate offer, PeopleSoft’s stock price has already been bid up from $15 to $18 in anticipation of a higher offer by Oracle or a white knight. Oracle, which has historically abstained from acquisitions, was sufficiently threatened by the prospect of a PeopleSoft/Edwards merger to act as spoiler offering most of its $6B of cash.
Cerberus Capital Management/General Atlantic Partners to acquire Baan
Category: Enterprise resource planning
Purchase Price: $135,000,000
Seller Revenue: $265,000,000
Revenue Multiple: 0.5x
Payment Terms: Cash
SEG’s Perspective:
Once a real competitor in the ERP space before falling early victim to an accounting scandal and selling to Invnesys for $800M, Baan fell victim again – this time to the stagnant ERP market and depressed corporate IT spending. Private investment firms Cerberus and General Atlantic are the beneficiaries, picking up Baan for a song. The investors will combine Baan with SSA Global, leveraging Baan’s strength in open systems and its European focus with SSA’s AS/400 strength and North American focus. The combined business will boast $600M in revenue.
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