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After more than a year of wooing, threats, rejections, and legal sprats,
Oracle CEO Larry Ellison has the luxury of relief, though temporary. On December
13 Ellison announced Oracle Corporation's gains in sales, net income, and
per-share earnings for the second quarter of fiscal 2005, plus a definitive
agreement to acquire business software maker PeopleSoft for $26.50 per share, or
$10.3 bn in cash. The deal is a major victory for Ellison, who fought off
multiple adversaries on the merger road, starting June last year-hostile
PeopleSoft board, hostile Craig Conway and vituperative Justice Department.
Under the US-GAAP, PeopleSoft isn't expected to aid Oracle's bottomline
until fiscal 2007. While the deal will add a marginal $0.01 per share in
earnings in fiscal 2005 and $0.08 per share in fiscal 2006 on a pro forma basis,
the real challenges of apps and license integration lie a few quarters ahead.
All said, the deal is a major victory for Ellison, who fought off multiple
adversaries to the merger.
Profits are written all over PeopleSoft's thriving maintenance and support
operations. Besides, with clients rating PeopleSoft high on business apps
support, customizability and platform integrity quotient, the services business
enjoyed stronger margins riding on the strength of its reputation for innovation
across platforms and databases. It appears reasonable for Ellison to assume that
PeopleSoft's rising margins on maintenance services will help the new entity's
net income growth cross 35% over the next two quarters.
This apart, the deal creates a software leviathan that appears to already be
growing well, thanks to Oracle's market-beating performance in the second
quarter of this year, when profits rose on the back of increased demand for
database programs, shooting net income up 32% to $815 mn. Oracle's results are
once again reflecting higher sales of new software licenses, and not merely
upgrades or product support services as in the first quarter.
So, will it make 'em bigger than SAP? PeopleSoft estimates an augmentation
of 12% in its operating margin, which should see it round fiscal 2004 with about
$3 bn in sales. Needless to say, the combined entity would then be a $12-bn
behemoth-no doubt, bigger than SAP at 5bn Euros for nine month ending
September 2004.
Now, comes the bitter pill: despite the inbuilt synergies of this deal, the
$10.3-bn price tag for PeopleSoft could force Oracle to tag on new debt. With a
cash flow of $3.4 bn, paying off any financing within two years may be an uphill
task for Oracle. The interest paid on debt could make money unavailable for
funding the R&D business and integration costs. Further, huge disparities in
the operating margins of the two companies will stay awhile yet. Cost cuts
ahead, Mr Ellison?
Ravi Menon in Bangalore
Next Page : Bumpy Ride to OracleSoft Page(s) 1 2
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