Microsoft-Yahoo: lessons from Oracle-BEA

Given the timing of events, it’s hard not to compare the current Microsoft-Yahoo takeover battle with the recently concluded conquest of BEA by Oracle. Some of the parallels are quite obvious with large, stalwart, traditional software organizations making bids on younger, (some would say) cooler targets in areas tangential to the core of the would-be acquirer. But rather than focus on the relative business domains of the participants, it’s much more interesting to dissect how the Oracle-BEA drama has impacted the strategies for both Microsoft and Yahoo.

Oracle originally offered BEA a 21% premium. In retrospect, this offer was a mistake that allowed the deal to linger far longer than was necessary. Ernst & Young has determined that the long-term takeover premium is approximately 24%. Given BEA’s position as the #2 vendor of enterprise middleware software, Oracle should not have expected to get a below-average price for such a target. By contrast, Microsoft’s initial offer to Yahoo provided for a 63% premium. Microsoft did not entertain the idea of getting Yahoo on the cheap. Microsoft realized that Yahoo is prime real estate and made a compelling offer.

Given the offer price, BEA had the luxury of time to negotiate with Oracle. BEA only had one very vocal investor, Carl Icahn, applying pressure on the BEA board to accept and offer or sell the company off in pieces. However, with a 63% premium dangling in front of them, a good many more of Yahoo’s shareholders are applying pressure on the company to act in one way or another to increase their investment.

On the flip side, Yahoo has a good many supporters, particularly within their user community, who have implored the company to avoid “going over to the dark side.” This groundswell of support, which did not exist to nearly the same degree for BEA, has given Yahoo the ability to push back and actively seek out a white knight strategy, seeking partnerships with either NewsCorp or Google as a way to bolster the company’s flagging stock and remain independent. This has forced Microsoft to take the fight directly to the shareholders, which is a much more cumbersome process.

In addition, Yahoo has taken the bold step of acting like a strong company instead of the weakling that BEA portrayed. Yahoo continued to acquire companies themselves, and to restrategize their core business. These moves can only work to improve Yahoo’s position.

Much of the Microsoft-Yahoo drama is yet to unfold, and there will undoubtedly be at least one significant plot twist ahead. Will Microsoft be able to dangle a big enough worm in front of Yahoo shareholders to set the hook? Will Yahoo find shelter in a nearby reef? Will a bigger fish come by and steal the prize first?

My gut tells me that eventually Microsoft will get what they covet. The only real unknown is how much it will cost.

BEA: sometimes you get the bear and sometimes the bear gets you

BEA is playing a high-stakes poker game right now with Oracle and it appears, at the moment, that Oracle just called BEA’s bluff. Oracle’s $17 per share offer for BEA, a premium of 21% over the pre-offer market price, has expired. Instead of considering the offer and negotiating in good faith, BEA countered with a price tag of $21 per share, an outrageous 80% premium.

What could BEA have been thinking?

BEA’s executives must have been reading the speculation that a white knight would arrive on the scene and pay upwards of $20 per share. But, despite the notion that SAP or some other company “needs” BEA to survive, no such suitor has stepped forward. As it stands, BEA has foolishly overplayed its hand, and the stockholders will pay dearly for it.

Senior management needs to recognize that the software industry is evolving and in a way that spells extinction for a dinosaur like BEA. While BEA was one of the banner carriers for enterprise Java, with its WebLogic application server once being the must-have platform during the dot-com boom, that is no longer the world that we live in. Ignoring all other technologies, the Java landscape is much different today than it was 8 years ago. The emergence of high-quality open source products has presented viable low-cost alternatives to the highly priced platforms from BEA, IBM, and others. IBM has adapted by shifting its sales model to one where the services organization drives the sale of its technology. But, BEA does not have a strong enough services organization to make that model work. (True, Accenture and the other large consulting firms will drive some sales to BEA, but they will also drive sales to other vendors as well.)

BEA has fallen into the trap of thinking that its (arguably) superior technology would win the day. This was a fatal miscalculation on the same scale as Apple vs. Microsoft, Netscape vs. Internet Explorer, and Digital Equipment Corporation vs. IBM. Apple, Netscape and Digital were, like BEA, pioneers in their fields and held strong, commanding leads in their markets. But all failed to recognize when the sands were shifting beneath them and all ultimately suffered greatly.

So, what should BEA learn from these past failures and from their own travails recently? First, things change and things change quickly. If you don’t act just as quickly to preserve yourself, you can find yourself irrelevant in no time at all. Second, 21% is a pretty darn good premium for a company with a declining market share, struggling with an outdated business model. Third, the wisdom of crowds. There is never any “secret information” that you can keep from being leaked that would give your company an 80% boost in valuation over what the market says. And, even if there were, why wasn’t management pushing full throttle to “pre-announce” an action and realize some of that gain sooner rather than later?

So now we’re left to wonder if another suitor will step forward to save this damsel in distress or if the evil dragon will escape with the prize at a discount? This is the time when the board of directors needs to do their job. Dean O. Morton needs to call up his buddies at his former employer, HP, and get them to make a $17 per share offer. The longer this ordeal lingers without some public offer, the worse it’ll get for BEA stockholders.

Yes, BEA, sometimes you get the bear and sometimes the bear gets you.