Numbers on the BEA and ORACLE deal
In looking at the numbers of Oracle and the numbers for BEA I come up with some interesting tidbits that can help think through the movements in the market.
BEA has officially rejected an offer at $17, main reason invoked by the board being that "BEA is worth more to Oracle". Note the distinction between "BEA is worth 12-17 by itself" from "BEA is worth more than 17 to Oracle". The latter statement has been the thesis of Icahn and co all along, that BEAS is worth more to a strategic buyer than it is worth on its own to its shareholders. That is the only way the shareholders are going to get their premium. The market either seems to agree or is just plain greedy by bumping the price of the common stock to almost 19 as of this morning Saturday.
So let's look at ORCL's number see if we can replicate some of the Icahn's team thinking. EV/EBIT=15 for ORCL (Enterprise Value to Cash Flow or EBITDA). EBITDA for BEAS is 242M which yields an EV = 3.6B. BEAS has $1.4B in cash minus 500M in debt which means 0.9B for a total of EV+cash=4.5B. Is an offer over $4.5B money lost to ORCL? How do you get to a 6.6B offer? simple, in M&A and boardroom parlance this is called "synergies", which in plain employee speak means: you are redundant.
With a EV/EBIT of 15, 1B in EV needs to be backed by EBIT of 66.6M. The name of the game then is to extract 66M from operations at BEAS to create a $1B EV for Oracle. For each 66M of EBIT extracted out of BEAS, Oracle's EV increases by 1B, which Oracle can pay to BEAS shareholders in the form of $2.5 per share.
Given that BEAS has 1.3B turnover, 66M represents a 5% increase in EBITDA. By the way, BEAS has an operating margin of 15%, Oracle 33%? Again the Icahn thesis that being an independent company in a consolidating market is just unsustainable and detrimental to investors.
So without changing ANYTHING to the operations of Oracle, Oracle figures they can can get 18% juice on EBIT from BEAS, which represents an EV increase of $3.6B.
So $4.5B + 3.6B = $8.1B. An 8.1B offer is a per share price of $20.8.
This deal can get done at $21
Again any additional 5% cut in operating expenses, represents a billion of value for ORCL and therefore a $2.5 per share. R/D for BEAS represents 15% cost and from Oracle's standpoint everything else is kind of redundant. If you cut everything but RD, you free up 55% EBIT which represents an additional 11B of EV which sets the price at an outrageous $48 per share of BEAS!
Without going this far (which would probably kill the baby) even by taking out simple redundant stuff like administrative and HR, you can juice up 15% of EBIT easily which means a $27 per share price. I rest my case and I am going to stop torturing virtual napkins and envelopes and conclude:
THE RANGE VALUE OF BEAS FOR ORACLE IS $20-$25
BEA has officially rejected an offer at $17, main reason invoked by the board being that "BEA is worth more to Oracle". Note the distinction between "BEA is worth 12-17 by itself" from "BEA is worth more than 17 to Oracle". The latter statement has been the thesis of Icahn and co all along, that BEAS is worth more to a strategic buyer than it is worth on its own to its shareholders. That is the only way the shareholders are going to get their premium. The market either seems to agree or is just plain greedy by bumping the price of the common stock to almost 19 as of this morning Saturday.
So let's look at ORCL's number see if we can replicate some of the Icahn's team thinking. EV/EBIT=15 for ORCL (Enterprise Value to Cash Flow or EBITDA). EBITDA for BEAS is 242M which yields an EV = 3.6B. BEAS has $1.4B in cash minus 500M in debt which means 0.9B for a total of EV+cash=4.5B. Is an offer over $4.5B money lost to ORCL? How do you get to a 6.6B offer? simple, in M&A and boardroom parlance this is called "synergies", which in plain employee speak means: you are redundant.
With a EV/EBIT of 15, 1B in EV needs to be backed by EBIT of 66.6M. The name of the game then is to extract 66M from operations at BEAS to create a $1B EV for Oracle. For each 66M of EBIT extracted out of BEAS, Oracle's EV increases by 1B, which Oracle can pay to BEAS shareholders in the form of $2.5 per share.
Given that BEAS has 1.3B turnover, 66M represents a 5% increase in EBITDA. By the way, BEAS has an operating margin of 15%, Oracle 33%? Again the Icahn thesis that being an independent company in a consolidating market is just unsustainable and detrimental to investors.
So without changing ANYTHING to the operations of Oracle, Oracle figures they can can get 18% juice on EBIT from BEAS, which represents an EV increase of $3.6B.
So $4.5B + 3.6B = $8.1B. An 8.1B offer is a per share price of $20.8.
This deal can get done at $21
Again any additional 5% cut in operating expenses, represents a billion of value for ORCL and therefore a $2.5 per share. R/D for BEAS represents 15% cost and from Oracle's standpoint everything else is kind of redundant. If you cut everything but RD, you free up 55% EBIT which represents an additional 11B of EV which sets the price at an outrageous $48 per share of BEAS!
Without going this far (which would probably kill the baby) even by taking out simple redundant stuff like administrative and HR, you can juice up 15% of EBIT easily which means a $27 per share price. I rest my case and I am going to stop torturing virtual napkins and envelopes and conclude:
THE RANGE VALUE OF BEAS FOR ORACLE IS $20-$25
Comments
Best I can do for you if you can't follow the math here is to take a picture of the number 21.
Taking BEA numbers (Enterprise Value from cash flow + cash - debt) we arrive at 4.5B value using Oracle multipliers.
The trick is that BEA operates at 15% EBIT and Oracle can operate that much better (the whole point of Icahn and co on the cost of sales and marketing).
Any additional 5% EBIT frees up 66M of cash flow which is equivalent to 1B enterprise value for Oracle.
The upfront 6.7B value meant Oracle can extract an extra 2.2B value from BEA or 11% EBITDA which puts BEA operating at 26% EBITDA.
It is better than BEAS crappy 15% but still lower than Oracle's 33% steady state EBITDA. At 33% EBITDA at BEA you come up with a 8.1B value of BEA at Oracle.
Hope this helps, it is truly straightforward, sorry if it sounds confusing, it is one of these things that sounds more confusing than it actually is. I would encourage you read the stuff again, without being too impressed by the numbers, you will get it. Shares in a company represent the present value of future cash flows so focus on the cash flow, cash flow comes from operations, operations breaks down in sales/marketing/r&d etc.
good analysis, i can see how BEA would think that they are worth more than current cash flow projections + slight premium, but Oracle is going to want to keep staff on the products...
i don't know what you think about the Oracle SOA stack, but I presume to know what you think of the JEE-app server stack, and so WebLogic is definitely sticking around, and I would presume that AquaLogic has some value in the medium-term...
with that, Oracle is going to want to keep strong BEA sales and product management teams, that is ions ahead of Oracle in the build-out of non-ERP middleware, so I think your assessment of the 20-25 is fair, and without a legitimate suitor/white knight coming in to bid it up, this is going to get done in the next week...
or perhaps BEA will take the case to its shareholders and Icahn will submit his own directors, and etc...and it will take longer, but the point is: there is only one buyer here, and that is Oracle...
though i am open to hear your IBM integration of WebLogic analysis, i just don't see that happening with Geronimo lingering, i know that sounds laughable, but the model is Glassfish/JBoss for WebSphere, not the WebLogic model...
Clearly the product line with appserver on up at BEA > Oracle so this will probably stay up to SOA stacks interfacing with ERP layers.
Staff wise, you are probably right, Thomas Kurian is no dummy and will know how to leverage the sales and marketing talent at BEA.
Icahn was pushing was board change basically because BEA's board was all Chuang friends and they felt there was no governance, there are not the only company with that problem.
The point was to push for a sale, so negative on Icahn recommending they turn down the offer to go solo.
Again the whole point of my little post is to reconstruct Icahn's thesis that BEAS value within ORCL is DOUBLE BEAS value standalone to shareholders.
On IBM, I didn't say I see them coming in and buying this, although they could. I don't see G as a real consideration in their strategy.
I do believe it is Red Hat they need to buy quick. I will blog about that in a bit.
BEA says they're willing to talk to anyone who offers $21 per share
http://www.theregister.co.uk/2007/10/25/bea_sets_price/
Bingo!!