A Closer Look: Oracle Acquires BEA

The move seems to have come out of nowhere. What does it all mean?

Oracle Corp.’s acquisition last week of integration middleware stalwart BEA Systems Inc. has been long-rumored and once-postponed. Now that it's a done deal, Oracle's move seems in retrospect to have come out of nowhere.

With respect to timing—it is a surprise to industry-watchers. They can, however, agree that what lies ahead is tumult for customers and competitors alike, and opportunity for Oracle.

Oracle first talked about acquiring BEA last October, just after SAP AG dropped an acquisition bombshell of its own by picking up Business Objects SA. At the time, Oracle offered $6.5 billion for BEA, a 25 percent premium over that company's trading price. That made BEA a high-priced purchase in October, but last week's deal was considerably pricier—nearly 27 percent more than Oracle's initial offer.

The deal has enormous ramifications for the middleware market, if for no other reason than that it makes Oracle—and not current market champ IBM Corp.—the industry's biggest middleware power, industry watchers say.

Oracle already markets its own highly competitive application server, data integration, enterprise application integration, and other middleware offerings; BEA’s enormous middleware portfolio will augment this tally.

"The BEA acquisition would make Oracle the number one player in the middleware space, pushing Oracle ahead of IBM. Over 50 percent of BEA's revenue is maintenance," writes Pat Walravens, an analyst with JMP Securities, in a research note. "Many of the PeopleSoft applications run on BEA's middle tier. In addition, many BEA shops run the Oracle database."

Oracle CEO Larry Ellison's take on the BEA acquisition is even more ambitious. "For Oracle, this deal is a very big step toward completing our vision of becoming a strategic enterprise software vendor of choice for our customers," he said during a conference call last Wednesday. "With this deal, we believe our open, standards-based technology stock will offer greater value to our customers than any alternatives in the marketplace, including those offered by Microsoft, IBM, SAP, Sun, and the open source vendors."

A BEA and Oracle combination might ultimately produce a middleware powerhouse, but before that powerhouse is a reality, Oracle must first significantly reconcile its products and technologies. After all, it already fields (or is in the process of fielding) either by acquisition or in-house development best-of-breed data integration, application-integration, application-server, and event-messaging technologies.

Inevitable Overlap

BEA brings its own best-of-breed application-integration, application-server, and event-messaging technologies to the table, so there's bound to be redundancy. Such a viewpoint has prompted more than a few industry watchers to question just what Oracle plans to do with BEA's assets.

"There's a lot of (from the outside) duplication between BEA's and Oracle's product lines," points out Michael Cote, an analyst with consultancy Redmonk, on his well-trafficked People Over Process Weblog.

It would be one thing, Cote concedes, if Oracle had a history of ditching legacy product lines, but the opposite is the case. "Oracle has shown that it doesn't go around just knocking out old product lines … [which is] probably a good move, despite the easy put-down this brings from the architectural peanut gallery," Cote continues, turning to the question that's on everybody's lips: "How are they going to handle consolidating those product lines?"

With this in mind, industry veteran Bob Warfield, a principal with SaaS and Web 2.0 think tank Smoothspan, wonders what the acquisition (or the assimilation of BEA's middleware assets) will mean for Oracle's still-coalescing Fusion middleware initiative.

Ellison positions BEA's middleware stack as a plug-and-play complement to Oracle Fusion. "Oracle Fusion middleware has an open 'hot-pluggable' architecture that allows customers the option of coupling BEA's WebLogic Java Server to virtually all the components of the Fusion software suite," said Ellison. "That's just one example of how customers can choose among Oracle and BEA middleware products, knowing that those products will gracefully interoperate and be supported for years to come."

Perhaps, but Warfield wonders whether, if BEA is so important to Fusion, as Ellison's statement seems to imply, that technology might not "be born with an obsolete architecture from day one."

What BEA Brings to Oracle

That poses another question: just what does BEA bring to the table? If WebLogic and other technologies complement what Oracle is already doing with Fusion middleware, where is the value-add? Does BEA's growth outlook justify the deal?

Warfield doesn't think so. BEA crested some time ago, he argues; it needed a buyer to bail it out. He cites a worsening economic outlook, speculation by prominent industry watchers (such as Cisco CEO John Chambers) about a looming slump in IT spending (BEA's revenue lifeblood), and other indicators as supporting evidence.

"This was a good move for BEA to let themselves be bought before their curve has crested too much more," writes Warfield on his Smoothspan Weblog. "For Oracle's part, it's a further opportunity to consolidate their Big Corporate IT Hegemony and to feed their acquisition-based growth machine." Regardless of its fitful courtship with Oracle, Warfield thinks BEA's eventual acquisition was a no-brainer. "[BEA is] way late on the innovation curve, which looks to me like it has already fallen. In short, BEA is a pure bean-counting exercise: milk the revenue tail as efficiently as possible and then move on," he writes.

Industry veteran Charles King, a principal with consultancy Pund-IT, has a more salutary take on Oracle's move. For one thing, King notes, Oracle isn't just getting BEA's technology: it's also inheriting that company's resources, including its veteran, knowledgeable sales teams; a huge (and lucrative) installed base; and innovative internal developers.

To the degree that BEA helps Oracle grow its market share, improve its own sales efforts, bolster its application server credibility, and augment its middleware integration technology, it's a savvy deal, King says. "Though it has continually expanded its enterprise software stack through internal development and deals for companies including Siebel, Stellent, and Hyperion, Oracle's signature database products remain a prime driver of both sales and the public perception of the company," he points out.

"BEA's assets should help Oracle fundamentally expand its middleware set and could also potentially give it a leg up on major software competitors including SAP."

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