Oracle bid puts pressure on PeopleSoft

The increased bid of $26 a share represents a 15 percent premium over the $22.70 closing price of PeopleSoft's shares on Wednesday. It's also is in the range of where several Wall Street analysts are forecasting PeopleSoft's share price to be trading in the next 12 months, strengthening Oracle's position as it seeks shareholder approval to replace half of PeopleSoft's directors in a March 25 election.

"It's a very serious offer from Oracle, so Mr. Larry Ellison is very much Mr. Persistent," said Robert Becker, an analyst with Argus Research. "And at $26 a share, there is a greater chance his bid will be successful."

Becker, for example, raised his 12-month price target for PeopleSoft to $26 a share from $24 following the company's earnings release last week. He noted that his new price target is subject to change, given Oracle's revised bid.

Before PeopleSoft announced its fourth-quarter results, Wall Street analysts had 12-month price targets ranging from $15 to $27 a share. But after PeopleSoft's earnings announcement, analysts raised their targets from $17 to $30 a share, according to research firm Thomson First Call.

Proxy solicitors, meanwhile, say Oracle's revised offer could sway PeopleSoft to sit down at the negotiating table with its hostile suitor, but it's no guarantee that talks would lead to a deal with its competitor.

"This completely changes PeopleSoft's strategy. This now puts PeopleSoft on the defensive and its board nominees at risk," said Rick Grubaugh, a senior vice president at proxy solicitor D.F. King. "Because the stock used to trade above the offer price, it eliminated the need for the board to accept the offer. Now the board can't hide behind the fact it is not a credible bid."

Investors apparently believe Oracle's offer is within the ballpark of what investors are willing to accept, Grubaugh said, noting that PeopleSoft's share price climbed only slightly after the announcement. PeopleSoft closed up 81 cents, or about 3.7 percent, on Wednesday. If investors believed the deal still undervalued PeopleSoft, the company's stock would have climbed higher after the announcement, Grubaugh said.

"Right now, investors are sending a message to PeopleSoft that this deal is credible and they have to negotiate," Grubaugh said. "These investors are inclined to vote for Oracle's opposing slate (of directors), unless PeopleSoft can present to them a plan that would create more value."

With the increased threat of losing board seats now that Oracle has raised its bid, PeopleSoft may feel compelled to come to the negotiating table, Grubaugh said.

Others argue that PeopleSoft is likely to reject the bid yet again because one of its main objections to the offer--the fact that Justice Department may block the deal as anticompetitive--remains unresolved, Piper said. "Without that going away, it's pretty hard for (PeopleSoft) to change their tune," Piper Jaffray analyst Tad Piper said.

Looming deadlines
PeopleSoft is required to respond to Oracle's revised offer within 10 business days, according to Securities and Exchange Commission regulations. Oracle expects to hear from the U.S. Department of Justice by March 12, as to whether antitrust regulators will challenge its hostile bid.

Investors who purchase shares by Thursday's close are likely doing so because it entitles them to vote at the annual shareholder's meeting March 25, he added. Thursday is the deadline for investors to purchase PeopleSoft shares if they want to vote at the annual meeting.

Proxy solicitors said there is no guarantee PeopleSoft's board will remain intact, even if the company is still conducting negotiations with Oracle at the time of the annual shareholders meeting.

"PeopleSoft can act like they are in intense talks, but they cannot give any indication they are close to doing a deal," Grubaugh said. "Aggressive institutional investors may end up voting for the opposition board, as a means to guarantee the outcome."

He noted that should Oracle and PeopleSoft begin negotiations, it would not be unusual to see a hostile suitor increase its bid price as a means to prompt the target company into doing a friendly deal. Oracle's chief financial officer and chairman, however, have said the $26 per share bid is the company's "final" offer.

PeopleSoft may also try a different strategy in the 11th hour leading up to the shareholders meeting, proxy solicitors said.

PeopleSoft, if it determines it may lose shareholder support for the existing board, could announce it has hired investment bankers to explore other means to bring value to shareholders.

"That signals to investors the company has been put up for sale as a way to attract a higher bid," Grubaugh said. "If the board commits to shareholders, they will seek offers in excess of $26 a share and are committed to doing a deal, then investors will want the PeopleSoft directors to remain on board to see it through."

Grubaugh said PeopleSoft will have a good sense of where its investors stand on director re-elections prior to the vote. Institutional investors tend to be in constant communication with the companies, even though they tend to vote their shares at the last minute.

Oracle's decision to raise the bid may have been triggered by PeopleSoft's decision to move up the date of its annual shareholder meeting to March from May, where the two companies plan to have a showdown over the election of new PeopleSoft directors, securities analysts said.