Oracle - peoplesoft merger - in the context of valuation, takeover regulation and corporate governance

Abstract

The current international business scenario is such that a number of organizations are looking for inorganic growth, i.e. mainly through mergers and acquisitions. Recent major acquisitions/mergers worth noticing are that of Adobe acquiring Macromedia, Unilever with Best Foods Ltd, IBM acquiring Ascential Software Corp and Oracle acquiring Peoplesoft which we are concentrating in our analysis. The aims of a merger can be manifold, such as increasing market share, increasing profits, bringing in operational efficiencies or gaining the distribution network of the acquired organization. These mergers have therefore to be understood certainly in the light of valuation of the two parties (which implies growth in cash flows, changes to the WACC, and changes to the capital structure). But at the same time, this analysis cannot stop at the valuation alone. With the issue of gaining market share comes the downside of an organization gaining disproportionate share and thereby leading to the erosion of a level playing field. Or, the acquirer could deploy measures such as replacing the complete top-line management with its own, thereby actually leading to a deterioration of value. Hence, keeping the above points in mind, we feel that the efficacy, relevance and ramifications of major acquisitions/mergers are something that needs to be analyzed in its entirety. In this Midterm report, we have concentrated in analyzing the initial impact of the merger on the two companies, investors, employees and the competitors. We have also made an effort in understanding the potential governance issues of failure in short term as well as long term and suggested certain precautions and guidelines to avoid these. 4 The Oracle buyout of PeopleSoft at $26.50-per-share or approximately $10.3 billion is one of the biggest acquisitions in entire history. Oracle took a look at PeopleSoft's maintenance business was substantially more profitable than previously believed and hence has been revising its bids upwards signaling the enormity of the gain that would result from the synergy between these two companies. In the nine months ended in last September, PeopleSoft's maintenance revenue ballooned to $919 million from $640 million in the year-ago period.