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Oracle Offers $6.7B for BEA Systems

Pouncing on an opportunity to add another weapon in an increasingly bitter business software battle, Oracle Corp. has offered to buy struggling rival BEA Systems Inc. for $6.7 billion in its latest shot aimed at another industry leader, SAP AG.

Oracle unveiled its $17-per-share cash offer Friday, the day after being told the bid was inadequate, according to a letter that BEA released a few hours after its larger rival revealed its interest.

"It is apparent to our board...that 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 the rejection letter.

Oracle President Charles Phillips expressed hope Friday that the two sides would be able to negotiate a sale. "We believe our all cash offer provides the best value for BEA's shareholders and the best home for BEA's employees and customers," Phillips said.

In a Friday research note, Goldman Sachs analysts Sarah Friar and Derek Bingham said they believed Oracle can afford to pay more than $20 per share, or about $8 billion, for BEA and still make money off the deal.

Oracle's takeover attempt comes less than a month after activist investor Carl Icahn announced he had bought a large stake in BEA in hopes of forcing a sale of the troubled software maker.

In an interview with CNBC Friday, Icahn predicted other bidders will emerge for San Jose-based BEA -- an opinion echoed by industry analysts. SAP, IBM Corp. and Hewlett-Packard Co. were listed as the most probable candidates to enter the fray.

"There should be competition for this one," predicted Forrester Research analyst Ray Wang. "IBM and HP need BEA a whole lot more than Oracle does."

SAP, IBM and HP all declined to comment on the speculation.

BEA shares soared $4.74, or 35 percent, to $18.36 in Friday afternoon trading -- above the price Oracle is offering -- reflecting investors' expectations another suitor will emerge.

Icahn, a billionaire with a history of pushing companies to reorganize or sell, may play a pivotal role in determining BEA's fate. He owns a 13.2 percent stake in the maker of so-called middleware -- computer coding that is commonly used on the Internet to make applications interact more smoothly with information stored in databases.

Redwood Shores-based Oracle has been stalking BEA for years only to be rebuffed in its overtures. Now that Icahn is involved, Oracle "smells blood in the water," said Bill Swanton, vice president of research for AMR Research.

Founded in 1995, BEA is considered a valuable asset largely because it has about 15,000 customers who generate more than $600 million in annual revenue for software maintenance and upgrades. JP Morgan analyst Adam Holt believes that figure could rise to more than $650 million in the next fiscal year, according to a Friday research note.

BEA hasn't been seeking a sale, but appears to be backed into a corner now.

Besides facing pressure to sell from the tenacious Icahn, BEA also has been dealing with an accounting mess tied to its mishandling of past stock option grants that has prevented it from meeting regulatory deadlines to file its quarterly and annual financial reports. The delinquency has threatened BEA's listing on the Nasdaq Stock Market and contributed to a sharp decline in its shares.

In its letter, BEA said that Wall Street will have a better handle on the company's value after it gets its financial house back in order.

Oracle has shown it won't take no for an answer in the past. In 2003, Oracle launched a hostile takeover bid for PeopleSoft Inc. and then spent the next 18 months overcoming its rival's staunch resistance before completing the $11.1 billion acquisition.

That began the biggest shopping spree in industry history as part of a strategy mapped out by Oracle's flamboyant chief executive, Larry Ellison. Convinced that more business software customers wanted a one-stop shop to buy all their technology, Ellison set out to create one by devouring Oracle's smaller rivals.

Oracle has already spent about $25 billion on 30 acquisitions during the past three years in an expansion aimed at surpassing Germany-based SAP in the sales of business applications software, which automates a wide range of administrative tasks.

SAP initially derided Oracle's acquisition strategy as misguided, but earlier this week signaled it is ready to go on the prowl too by agreeing to pay $7 billion for Business Objects SA, a maker of software that helps companies analyze their internal deal. That deal countered Oracle's $3.3 billion purchase of Hyperion Solutions earlier this year.

Cowen and Co.'s Peter Goldmacher is among the analysts who believe SAP's won't let Oracle snatch BEA without a fight. "We believe that if SAP lets (BEA) get away, its weakening position in the software pantheon will accelerate as it is increasingly relegated to niche vendor status," Goldmacher wrote in a Friday note.

If SAP bids for BEA, it would also represent a bit of revenge. SAP had agreed in 2005 to buy a smaller business software maker, Retek Inc., only to be outbid by Oracle.

In another sign of the deepening acrimony between the two companies, SAP has acknowledged that one of its subsidiaries infiltrated Oracle's computers to help customers maintain their software. Oracle is suing SAP in federal court, alleging its rival's behavior broke laws protecting intellectual property.

IBM and HP have different reasons for possibly pursuing BEA.

Armonk, N.Y.-based IBM already is a major player in the middleware market and may view a BEA acquisition to prevent Oracle from threatening its position, analysts said. IBM and Oracle already are fierce rivals in database software -- a market where Oracle has been the longtime leader.

HP is believed to be interested in expanding into middleware market by either buying BEA or Tibco Software Inc. The Palo Alto-based company has already proven it's willing to tackle acquisitions involving stock option problems, having bought Mercury Interactive Corp. last year for $4.9 billion.

Although SAP has maintained its lead in business applications software, Oracle's expansion has been paying off handsomely for its shareholders. The company earned a record $4.3 billion in its last fiscal year and its stock price has climbed by more than 60 percent since 2004, creating more than $40 billion in shareholder wealth.

Oracle shares fell 3 cents to $22.42 in Friday afternoon trading.

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