BEA: going, going…

After years of conjecture and rumor, it appears that BEA’s days as an independent company are numbered.

As reported by Bloomberg, Oracle has started the bidding for BEA at $6.7B. This shouldn’t come as too much of a surprise to anyone paying attention to Silicon Valley. For a couple years, rumors have been swirling that BEA wouldn’t be able to stay independent long-term. Even with the acquisitions of Fuego and Plumtree, BEA has been unable to regain it’s position as the leading J2EE vendor. In fact, BEA’s WebLogic has been steadily losing market share not only to IBM’s WebSphere, but also to JBoss.

This is undoubtedly a legitimate acquisition attempt, but it leads me to wonder if this is the best strategy for Oracle, and if there are any suitors who would benefit more by acquiring BEA. Let’s take these one at a time.

Is this the best strategy for Oracle?
Now that Oracle has made this public announcement, it’s doubtful that Larry Ellison would be able to walk away from this auction without the prize. But, Oracle would probably benefit more by considering other targets and diversifying. Oracle’s database customers and BEA’s application server customers overlap to a large degree. Therefore, this acquisition would provide a relatively small number of new opportunities for cross-selling. Which means that Oracle would only really be gaining the existing revenue stream that BEA’s licensing provides. Given that Oracle’s market capitalization today is $115B and BEA’s market capitalization is $7B, it is apparent that these additional licensing fees would not contribute significantly to Oracle’s bottom line. And, once Oracle writes off it’s existing application server business, the benefits would be further diminished.

I would think that a more attractive target for Oracle would be Red Hat. With a market capitalization of $4B, the acquisition price would ultimately be lower than that for BEA. Furthermore, an acquisition of Red Hat would give Oracle an extension in product offering and market segment penetration. Red Hat’s JBoss application server has greater market share that BEA’s WebLogic. True, JBoss does not generate any licensing fees. But, it provides an entry to new customers, who will eventually outgrow the open source databases that they are likely using, such as MySQL, and will need the industrial strength solution that Oracle provides. Through JBoss, Oracle would have an opportunity to capture these new database customers, using the existing relationship to prevent their selection of Microsoft’s SQL Server.

Furthermore, Oracle would be gaining the whole Red Hat Linux customer base. If Oracle ever wants to challenge Microsoft, eventually they will need to have an operating system product to complete the software stack offering.

Would other suitors benefit more by acquiring BEA themselves?
Yes! As the Bloomberg article explains, SAP may feel compelled to join the bidding for BEA if for no other reason than to keep up with the Ellisons. SAP is already reeling and is steadily losing ground to Oracle in the ERP market, as SAP’s products age and organizations reconsider their options.

HP would also make an interesting acquirer. HP is quietly growing their software business, through the OpenView product line. BEA’s suite of products would be a logical extension of HP’s stack. Not to mention, the publicity of such an acquisition would help HP break the public perception that they just make printers and, through Compaq, laptop computers. This would be a statement that HP should be mentioned in the same breadth as IBM in terms of hardware, software, and services.

But, the best suitor has thus far been overlooked: SUN. True, with a market capitalization of just $22B, SUN wouldn’t be able to acquire BEA. Instead it would need to be a SUN:BEA (3:1) merger. Of course, this move is probably no longer possible. But, had it taken place when Jonathan Schwartz assumed control, SUN could have finally reaped the benefits in the corporate world that it’s technology, Java, created. And, like HP, SUN would benefit greatly from the publicity, and would be able to reemerge as the company that puts the dot in Web 2.0.

I, for one, will miss an independent BEA. But, consolidation in the technology world is inevitable and BEA is ripe for the picking.