Oracle withdraws offer for BEA Systems

Oracle let its offer for BEA expire over the weekend, effectively kicking the ball over to Carl Icahn and other BEA shareholders that have been pushing for a sale of the company.

Oracle's offer was $17 per share. At first, BEA didn't respond. Then when it did, it said $21 was a fair price. Oracle said no, $17 is more than fair. No one else--such as IBM, H-P, or SAP, stepped in as an alternative bidder. So, Oracle let its offer expire.

David Parker at SunTrust Robinson Humphrey has more insight on what is likely going on behind the scenes at BEA:

What a Mess. Oracle followed through on its resolve and terminated its $17 per share offer for the company on Sunday. Activist shareholder Carl Icahn will likely have to follow through on his threat for a proxy battle as our research for some time has concluded that BEA’s Board of Directors had likely given Alfred Chuang, the company’s CEO, yet another chance to try and right the ship operationally, under the auspices of the company’s latest grand technology play, Project Genesis. Project Genesis is described as a new application-tier platform that is meant to converge its service-oriented architecture (SOA) technologies, business process management (BPM), Web 2.0 technologies and other tools and allow for both business and IT users to quickly assemble new application functionality.

We believe investor fatigue with BEA and its inability to drive sustained license growth is notable and few want to hear of BEA espousing yet its latest and greatest platform technologies that will disrupt enterprise computing. We hear internally there is a rallying cry to do everything possible operationally to stay independent and we believe even the heretofore closed cash coffers are being opened up to belatedly invest in needed sales, marketing and acquisitions. Even if the current drama ebbs and somehow the company is able to stay independent, those investors that are willing to re-engage on fundamentals must grapple with the potential for increased operating expenses in order to grow the business, potentially disruptive technology/product transitions and risks around acquisitions.

Ultimately we think there is still a probability greater than 50% that BEA is taken out and Oracle is the winner....The company may very well scrape by but recent events are likely to disrupt larger enterprise transactions.

BEA is in a tough position. The company has long prided itself on its independence, a position that is increasingly difficult to maintain in the current wave of technology vendor consolidation. Although business for tech vendors has been quite strong this year, softness in consumer spending due to the weaker dollar and housing downturn could spread to business spending. Furthermore, as Parker points out, questions about BEA's future is likely negatively affect is ability to close new deals in the coming months. If so, its share price could weaken, making any future offer from Oracle likely to be even lower than its $17 bid.

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Epicor to miss its revenue targets

Epicor just updated its forecast for its third quarter financial results, and the picture isn't pretty.

The firm says that revenue for the quarter will be between $110 million and $112 million. Wall Street has been expecting revenue in the neighborhood of $119.5 million.

Epicor's explanation for the shortfall is also weak. It blames its method for forecasting sales to more accurately reflect the timing of the close of larger orders. It says it has now changed its forecasting process and as a result it expects year-over-year software growth rates to be affected for the next quarter or two. It looks as if the firm is positioning itself for continued bad news.

Commenting on Epicor's announcement, David Parker at SunTrust Robinson Humphrey writes,

This is the second quarter in a row in which the company has missed license revenue estimates and we feel this stems from an abrupt lack of focus with regards to mid-market customers, which we find surprising given that these customers are the company’s core target market. Although we understand the desire to move the product up-market, we are hard pressed to find a valid reason for meaningful license misses simply because the company finds it challenging to balance a move up-market with historic success in the mid-market. In addition, our belief that the company can return to at least double-digit license growth is hindered when weak execution in the core market is combined with the intense competition from the likes of SAP and Oracle in the large enterprise market.

As Parker points out, Epicor is in a tough position. Oracle and SAP are aggressively coming down into the mid-market, largely though VARs and resellers, and are doing a pretty good job of winning deals. At the same time, vendor consolidation has made buyers question the viability of smaller vendors. Epicor's announcement this week reinforces buyer fears that the firm is not on a winning path.

Ironically, Epicor has been one of the players behind the vendor consolidation trend--snapping up a series of even smaller players in the past years. This gives it a diverse portfolio of product offerings, but raises questions about its ability to support them all. It appears to be promoting its Vantage product as its flagship offering right now, as a way of countering perceptions that it is simply a rollup of smaller vendors. But its announcement this week shows that it's not being successful in this strategy.

Update, Nov. 15: Rumors of a layoff coming at Epicor.

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Microsoft: the Rodney Dangerfield of open source

If you haven't been following the latest developments in the open source world, here's an interesting development. The Open Source Initiative (OSI) has just certified two Microsoft licenses as open source.

This is a big deal. OSI is the organization that determines which software licenses qualify as open source, according to a list of 10 criteria. Microsoft submitted two of its shared source licenses, the Microsoft Public License (Ms-PL) and the Microsoft Reciprocal License (Ms-RL) to OSI, which generated an enormous amount of debate within the open source community concerning Microsoft's motives and whether OSI should approve such licenses.

In the end, however, OSI gave the nod to the two Microsoft licenses. OSI president Michael Tiemann wrote, “The decision to approve was informed by the overwhelming (though not unanimous) consensus from the open source community that these licenses satisfied the 10 criteria of the Open Source definition, and should therefore be approved.”

Lora Bentley's blog on IT Business Edge has a good round up of the news.

Microsoft's motives
So why is Microsoft, whose CEO Steve Balmer once referred to the open source operating system Linux as a "cancer," now seeking approval of its two licenses as open source? I think the answer is two fold.

First, Microsoft needs to do everything it can to counter the perception (and reality) that it has monopoly power. For example, it is having to jump through very small hoops in Europe in order to comply with a 2004 anti-competition EU court ruling. Just this month it has agreed to make workgroup server interoperability information available to open-source developers. Like it or not, Microsoft has to open up and if it is going to open up it might as well do so on its own terms.

Second, open standards are increasingly valued by buyers in their technology decisions. For example, three years ago the State of Massachusetts proposed a mandate that all state documents be saved in open, standards-based file formats. This move nearly cost Microsoft the loss of its entire Office business in the state. Only intense lobbying by Microsoft got the state to draft specifications that allows state workers to continue using Microsoft Office, as long as they used its open XML format to save documents. Openness is part of the buying decision for many purchases, and if Microsoft wants to win it has to open up.

No respect
Which leads to a paradox. Why does Microsoft get so little credit for its move to open source, while companies like Apple get very little criticism for its continued reliance on proprietary systems?

Apple really likes open source--as a component of its offerings. For example, Apple incorporates open source code from GNU, OpenBSD, NetBSD, and FreeBSD into its Mac OS X operating system. But when has Apple ever--I mean ever--released any of its own code as open source? Its iPod music format is proprietary. iPhone handheld device can only operate on Apple's partner AT&T's network. Apple takes all kinds of legal and technical measures to keep these products closed.

Yet many of the same folks that criticize Microsoft for its perceived lack of openness are carrying iPhones and iPods.

Even a small thing like blogging shows how little respect Microsoft gets for openness generally. There is probably no company in the world that has more of its employees blogging--with corporate approval but little corporate control--than Microsoft. In contrast, Apple is like the old Soviet Union. The firm does not allow employees to blog as Apple employees, in line with its near-obsessive attempts to control information. It even posted a notice at its developer conference last year warning attendees not to blog any information presented.

Yet, nearly everyone thinks of Apple as cool.

Microsoft's public and private war against open source, historically, has a lot to do with its credibility gap in the open source community. Read the Halloween Documents if you don't know what I'm talking about. And, much of it simply goes with the turf of being the largest software company in the world.

The reality, however, is that even Microsoft is being forced by the market into open standards and open source. And that's good news for technology buyers.

Update, Oct. 25. A commenter (read here) points out that Apple released Webkit and Darwin as open source. Webkit is an application framework built with code that Apple developed along with components of the KDE open source desktop environment. Darwin is a desktop OS built with code from other open source projects along with code that Apple got from its acquisition of NeXT. I stand corrected.

Some of the other comments serve as evidence of my main point: Microsoft does not get much credit for open sourcing some of its code and--because of its own behavior in the past--may never get respect. It is probably being forced into openness for the reasons I outlined in the post, but regardless, Microsoft's actions are good for buyers.

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SAP wins at Wal-Mart but reports slowing growth in U.S.

SAP just reported its third quarter results, with a 11% growth in new license sales worldwide but a measly 3% growth in the U.S. New license sales growth was stronger in other markets: 14% in EMEA and 25% in Asia-Pacific. SAP said it now expects overall software and related sales for 2007 to reach the upper end of its estimate of 12% to 14%.

SAP's growth vs. Oracle's
These results do not look great in comparison with Oracle's most recent quarter (its Q1). Last month Oracle reported a 35% increase in new license sales, including a 65% increase in application software revenue. Of course, Oracle's results include the benefit of its new acquisitions of Hyperion and Agile Software. Its not clear to me how much of the increase is due to revenues from those product lines, but it certainly can't explain all of the difference from SAP's growth rates.

Although the SAP versus Oracle story is interesting, I'm more concerned with what SAP's results mean for the business software sector overall in the U.S. I note that the market has been strong over the past couple of years, based on financial results for the major vendors as well as observations of the general level of sales activity. Do SAP's quarterly results point to a slow-down? Oracle's results seem to indicate a more positive outlook, although Oracle will say that SAP's slowing growth is caused by Oracle's winning deals against SAP. Complicating the picture: SAP claims its market share is increasing in the U.S., which is hard to imagine in light of the disparate growth rates of SAP and Oracle, unless they are both taking market share away from smaller players.

Win at Wal-Mart
Separately, SAP announced that it had won a deal with Wal-mart for financial management software. Wal-Mart is known to run mostly in-house developed systems, but apparently felt that the horizontal nature of accounting applications justified a departure from this strategy. SAP will replace some legacy systems while integrating with other internal systems. Terms of the purchase were not disclosed, but--this being Walmart--there's no way this can be a small deal.

In light of SAP's battle with Oracle, the Wal-Mart deal gives bragging rights to SAP--assuming the implementation is successful. Unfortunately, it won't be a quick. The first phase of a multi-phase implementation is expected to finish in 2010.

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Oracle bids for BEA Systems

There seems to be no end to Oracle's acquisition campaign. The latest move is a $6.7 billion bid for BEA Systems, one of the leading vendors of middleware. A successful bid for BEA will greatly strengthen Oracle's middleware and tools business and take a major competitor out of the picture.

Oracle has been hounding BEA, unsuccessfully, to sell for years. But BEA's recent share price decline, driven by its problems in accounting for stock option grants, has put BEA in a much weaker position. It hasn't helped that last month Carl Icahn purchased 13.2% of BEA's shares, hoping to force BEA to sell out to someone.

So now Oracle has stepped in as a willing buyer.

An AP story on Oracle's bid points out that Oracle has demonstrated its willingness to fight in order to complete acquisitions in a hostile manner if necessary. Its PeopleSoft acquisition in 2003 is the best example. There, Oracle even fought the U.S. Department of Justice, which sued Oracle in order to block the deal on anti-trust grounds.

It doesn't sound as if Oracle will need to fight that hard for BEA, however. BEA is wounded, and too many stakeholders will rather see Oracle's bid succeed, at a 25% premium over BEA's share price yesterday.

But Oracle's problem might not be BEA's willingness to sell--it might be other bidders. Carl Icahn spoke to CNBC a few minutes ago and indicated that he expects other potential buyers to make offers. He specifically mentioned H-P and IBM.

To which I might add, what about SAP? It's unlikely, with SAP just having offered nearly $7 billion for Business Objects, but it sure would be make things interesting.

Update, Oct. 13. As it turns out, according to the Wall Street Journal, Carl Icahn has already mentioned SAP as a potential alternative bidder for Business Objects. However, there appear to be reluctance on the part of all three bidders (IBM, SAP, and H-P) to make offers.

A person familiar with IBM's thinking said IBM is unlikely to enter the bidding fray, because IBM typically buys small software companies, and the Oracle offer for BEA is already about twice as much as IBM has ever paid for an acquisition. Plus, this person said, there is enough overlap between IBM's WebSphere software and BEA products that it would probably raise antitrust scrutiny. An IBM spokesman declined to comment.

A person familiar with SAP's thinking said the company would be unlikely to be interested in buying BEA because it wants to focus on a competing product, called NetWeaver. An SAP spokesman declined to comment.

An H-P representative said H-P isn't interested in entering BEA's market, but declined to comment specifically on whether it had any interest in buying the company.

If so, Oracle may not find much competition to its offer.

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SAP to buy Business Objects

Vendor consolidation in the business intelligence (BI) space continues with SAP announcing its acquisition of Business Objects, one of the last independent best-of-breed vendors of such solutions.

The move is, in a way, an answer to Oracle's acquisition of Hyperion, a Business Objects competitor, earlier this year. Although SAP already has significant BI capabilities, it apparently felt the need to strengthen its offerings. Its acquisition of Business Objects certainly fills the bill.

Consolidation in the BI market has been going on for some time now. In 2003, Business Objects itself acquired Crystal Decisions, a popular developer of end-user reporting tools, used by quite a few enterprise system vendors. Shortly thereafter, Hyperion acquired Brio. As mentioned above, both Hyperion and Business Objects now are part of the two leading enterprise system providers.

SAP indicated that it intends to continue to operate Business Objects as a separate business. This will limit the cost-savings that SAP will realize from the deal, but it will probably be more attractive to customers that don't necessarily want to be tied to SAP. As the Wall Street Journal points out, it also helps SAP avoid having to deal with French laws that limit the ability of employers to conduct layoffs. Business Objects is headquartered in France.

OpenMFG is now xTuple

I really dislike vendor name changes, but here's another one. OpenMFG, the open source ERP vendor, has changed its name to xTuple. It appears the name change is the result of adding a second product, PostBooks, in addition to the organization's existing OpenMFG product. So the name of the vendor had to be changed to something other than the name of the product. It makes sense, actually. Because PostBooks has applicability beyond the manufacturing industry, a new name was also needed for the organization that did not imply a strictly manufacturing-orientation.

The PostBooks product is not a separate product from OpenMFG. It appears to be a subset of OpenMFG code that the firm distributes on a truly open source basis (under the CPAL open source license). This allows users with limited needs or individuals that want to prototype a limited set of functionality to do so without getting involved in licenses or contracts. There's a comparison chart on xTuple's website that explains the functionality present in each product.

There's more information on the CPAL license in this InternetNews article, which quotes xTuple's CEO Ned Lilly on reasons for going with the new license.

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