Stock Market - They just don't get it

[Boris]

Below is a developing story about Peoplesoft. The Board of Directors of Peoplesoft enacted a provision that would give customers 2x-5x their money back on all orders if there is a change in control of the Board. This effectively blocks potential acquirors (i.e. Oracle) from buying the company and shareholders from voting out the management. To be honest I was shocked that the PeopleSoft Board had the chutzpah to enact such a provision given all the press and scandal about bad corporate governance.

Oracle May Drop
Bid for PeopleSoft
Over Refund Offer

By DAVID BANK
Staff Reporter of THE WALL STREET JOURNAL


Oracle Corp. says it may be forced to abandon its hostile $7.3 billion bid for PeopleSoft Inc. if the Pleasanton, Calif., software company continues to offer its customers licensing-fee refunds in the event Oracle succeeds.

Oracle, based in Redwood Shores, Calif., asked the Delaware Court of Chancery to speed action on an injunction against PeopleSoft's "customer assurance program," under which PeopleSoft has been offering customers refunds of between two and five times their software-licensing fees if an acquirer fails to meet certain conditions.

PeopleSoft last month said the potential liability, under a revised version of the refund program, totaled nearly $800 million at the end of the third quarter. Last week, some PeopleSoft shareholders filed a motion in the same court seeking a preliminary injunction to block the revised program.

In a filing Monday, Oracle takes particular aim at a provision of PeopleSoft's revised offer under which the refunds would be triggered by a change in majority control of PeopleSoft's board, whether the change is the result of an acquisition or a simple shareholder vote. Under the new program, refunds of between two and five times a customer's software-license fees will be triggered if PeopleSoft is acquired within two years, instead of one year under the original program, and the buyer takes certain actions to reduce product support within four years, rather than two years.

A PeopleSoft spokesman said the program is "good for customers, and ultimately good for shareholders."

Oracle's cash bid of $19.50 a share is effectively on hold pending a review by Justice Department antitrust regulators that is expected to be completed before year end. In its filing, Oracle said, "If the PeopleSoft board is permitted to continue to issue self-serving, entrenchment-motivated contracts under the revised money-back offer, Oracle may be forced to abandon its bid as it will no longer be economically viable."

[adios]

PeopleSoft has a market cap of about $9 billion so Oracle's going to have to up the offer. My understanding is that "Poison Pills" like the one PSFT adopted are common .

[Boris]

The poison pill provisions I am familiar with are in the form of a stock split that is triggered in the event of a takeover. These poison pills I'm pretty sure need shareholder approval.

I was surprised by the PeopleSoft provision because the board tried to enact this particular poison pill w/o shareholder approval. This provision also kicks in if there is a majority shift in board control, not just a takeover. Given Conway's $120m+ compensation package I still think it stinks.

If Oracle's offer is too low then Peoplesoft wouldn't need the poison pill as the shareholders would not approve the deal. Usually in these public acquisitions the final acquisition price is an average of previous 5 (pick a number) days trading closing price with a collar. So in this case it would be $7.8b with a maximum variance of +-20% or whatever the collar was set at. You also need to take into account that Oracle is offering cash and not stock so the acquisition price will naturally be at a discount to the market cap.

[adios]

I know you know that I'm not necessarily sympathetic to PeopleSoft management, in fact I'm not at all sympathetic to management that treats shareholders as second class citizen's so to speak. I'm not that familiar with PeopleSoft or Oracle but if the shareholders don't have a say I think it stinks too.

"You also need to take into account that Oracle is offering cash and not stock so the acquisition price will naturally be at a discount to the market cap."

I knew it was an all cash offer but I wasn't aware that there should be a discount to the market cap. I'm not sure why that would be. Not disagreeing with you, just trying to learn something. If you're acquiring another company's intellectual property, hard assets, and future earnings it seems that a premium should be paid to me since the market cap has the IP priced in supposedly as well as discounted future earnings and the combined entity supposedly should have greater earnings potential than the two separate entities. TIA for any explanation.

[Easy E]

On a very simplistic level, it might be the same concept as getting a lower gasoline price if you pay cash, vs. credit.

When you swap stock and debt to buy the company's assets, you have to convert them if you want the cash, or are delayed in doing so.

Cash spends pretty quickly.

But, like you, I look forward to the REAL answer..

[adios]

FWIW as far as PSFT long term debt there is none and a debt to equity ratio of 0 which is typical of a lot tech companies. At least that's what Yahoo stats say. CSCO announced an all cash acquisition paying a 30% premium. Admittedly it's much smaller than a deal for PSFT.

UPDATE - Cisco inks Web conferencing acquisition (http://biz.yahoo.com/rc/031112/tech_cisco_latitude_3.html)

Reuters
UPDATE - Cisco inks Web conferencing acquisition
Wednesday November 12, 10:38 am ET
By Ben Klayman


(Recasts first sentence, adds background, stock action, byline, changes dateline from NEW YORK)
CHICAGO, Nov 12 (Reuters) - Cisco Systems Inc. (NasdaqNM:CSCO - News), the top maker of equipment that directs Internet traffic, said on Wednesday it would buy Web-based conference software maker Latitude Communications Inc. (NasdaqNM:LATD - News) for about $80 million.

Cisco, based in San Jose, California, said the deal will build on its Internet-based products.

Latitude's desktop conferencing software and services allow office workers in different locations to share and distribute documents over the Web. Companies have turned to such Web conferencing to cut costs.

Cisco said it would pay $3.95 in cash for each share of Latitude, representing about a 30 percent premium over Latitude's closing stock price on Tuesday of $3.05.

Shares of Santa Clara, California-based Latitude soared 27.5 percent to $3.89 in morning trade on Nasdaq.

Cisco's entry into the Web conferencing market, which according to several estimates could grow to $3 billion by 2005, will further pressure smaller rivals such as WebEx Communications Inc. (NasdaqNM:WEBX - News), whose stock fell 6.5 percent.

Shares of Cisco rose 1.2 percent to $22.62.

Latitude, which went public in 1999 and has 183 employees, had revenue of $26 million for the first nine months of 2003 and a net loss of $72,000.

Microsoft Corp. (NasdaqNM:MSFT - News), the world's largest software maker, earlier this year spooked smaller rivals when it entered the Web conferencing market with its $200 million acquisition of privately held Placeware Inc.

Cisco said the acquisition of Latitude -- expected to close in the second quarter of its fiscal 2004 year which ends in January -- would lead to a nominal one-time charge for purchased research and development expenses.

Upon closing of the deal, Latitude will become part of Cisco's voice technology group.

Cisco also said it will convert all outstanding Latitude stock options to Cisco options. (Additional reporting by James Paton in New York and Reed Stevenson in Seattle)

[Boris]

In a stock swap the acquiring company has to issue new shares of its stock and these shares must go through a registration process with the SEC. In my experience, which admittedly is all with public company acquisitions of private companies, there is always some sort of restriction on resale of the shares the acquirees receive. These restrictions can last anywhere from 6-18 months. The net effect of these restrictions is that cash is alot more fungible than shares of stock received in the transaction. As result, cash valuations tend to be lower than stock swap valuations because with cash you aren't forced to shoulder the market risk of a stock swap.

I should also add a disclaimer that I am not a corporate lawyer. In fact I'm not a lawyer at all so you should take any of my comments with respect to securities laws with a grain of salt.

[Boris]

If I remember correctly the Oracle offer when it was announced was a something like a 16% premium to PeopleSoft's market cap. My prediction is that Latitude's share price will be within $0.05 of 3.95 when the deal closes. why just today the stock price closed at $3.89. If I'm wrong I'll find an excuse /images/graemlins/smile.gif

Upon reading my original post I should have said that cash offers should be lower than stock swap valuations, not lower than the market cap when the deal is announced. Obviously, market forces will drive up the acquiree company stock price prior to the deal being consummated.