How much will Oracle put up to regain its database stronghold?

Oracle may be willing to spend a record sum -- over $6 billion -- to acquire a middleware provider it believes will give it a permanent leg up on Microsoft's SQL Server. Does it still take a huge M&A like this to stay on par with Microsoft?

Database and applications software giant Oracle is trying hard to buy BEA Systems, a big-time middleware maker -- and Oracle is willing to shell out $6.6 billion for the privilege. Business customers could stand to gain by getting a robust and integrated alternative to the Microsoft SQL Server environment.

But will the deal happen? And if it doesn't, does the database crown get transferred to Microsoft, as an addition to its trophy case along with the word processing crown, the collaboration tools crown, and the network mail management crown?

Remember back when databases stood as Oracle's main claim to fame? Well, after snapping up application software vendors PeopleSoft and J. D. Edwards (JDE) a few years ago, Oracle is now chasing down middleware maker BEA Systems with a $6.6 billion offer. If Oracle somehow manages to pull off the deal, many business customers actually stand to gain, especially big enterprises that prefer to run Microsoft Windows alongside non-Microsoft operating environments such as Linux, Unix, and mainframes.

Although Oracle still wants BEA Systems, BEA is holding out for a better deal, Oracle's president and CFO, Safra Cata, suggested this week. Cata also confirmed that, over the past few weeks, Oracle has continued talks with BEA that started in October. But Cata said, too, that Oracle has now decided no "friendly" offer -- in other words, a pact which is willingly embraced by BEA -- can be accomplished "with the current BEA board at a price and terms acceptable to Oracle."

So why does Oracle want BEA so badly, anyway? For one thing, according to quarterly financial results released this week, Oracle is now growing more than twice as fast in application software -- at 63% year-over-year, in new licensing revenue -- as on its combined database and middleware sides.

Still, Oracle's 28% year-over-year growth rate for database and middleware isn't exactly chicken feed either.

But Oracle faces intensifying competition for its long-time database stronghold from Microsoft, a rival that's been working hard for years and years on creating a highly integrated middleware and applications software environment to accompany SQL Server.

With business already booming for its own database, Microsoft is currently pouring a lot of its considerable energies into supporting the launch of the virtualization-oriented SQL Server 2008 in February of next year.

Yet if Oracle's BEA buyout ever really happens, the deal will supply Oracle with a more robust middleware environment -- and through integration between BEA's middleware and the Oracle database, customers would gain a stronger alternative to SQL Server and the surrounding Microsoft .NET environment.

Moreover, many businesses want just this kind of choice. Although nearly all enterprises run some Microsoft software these days, lots of IT managers say they try their best to avoid "lock-in" to a specific vendor. And with Sun exhibiting greater openness these days, they're typically referring mostly to Microsoft.

Ironically, Oracle itself has been accused of just this sort of vendor lock-in, particularly by some customers of acquired properties such as PeopleSoft, JDE, and sales force automation specialist Siebel, who have opted to hire the now SAP-owned TomorrowNow or other third-party support specialists in lieu of Oracle Consulting.

But with Oracle ERP (enterprise resource planning) rival SAP now in court over charges that TomorrowNow hacked Oracle, could it be that some erstwhile disenchanted customers are finally giving up their grudges and signing on with Oracle?

Although Oracle isn't giving an answer here, this could stand as one factor in the company's stellar rise in new software licensing during Oracle's most recent quarter. For that matter, by the way, Oracle's services revenue also stepped up during the quarter to the tune of 22%.

BEA -- like Oracle, a company that's grown through acquisition -- now affords a Web SOA (service-oriented architecture) environment that could easily be used by Oracle to promote interoperability among its database, applications from its various acquired properties, customers' own custom apps, and other software from myriad operating environments.

BEA is also being widely hailed for its AquaLogic BPM (business process management) software suite, designed for automating customer-specific tasks such as manufacturing processes and document management routines. Recently, BEA was named to Gartner Group's prestigious "magic quadrant" in the BPM category.

Microsoft offers BPM, too -- most specifically, through its BizTalk Server middleware. But Microsoft's BPM requires installation of not just SQL Server, but a whole wide range of other .NET servers and components.

For companies that are on the fence about making deeper investments into Microsoft technology, could BEA's BPM serve to dissuade them?

Oracle's current efforts to buy BEA have major precedent in Oracle's purchase of a similarly reluctant PeopleSoft through an unfriendly acquisition back in 2003. But although at $10.3 billion, PeopleSoft might have cost more than Oracle bargained for at first, the unfriendly buyout has indeed paid off handsomely for Oracle in the end.

Oracle CEO Larry Ellison acknowledged this week that Oracle has been pursuing a strategy of growth through expansion into vertical industries, during the same financial conference call in which Oracle's Cata confirmed Oracle's continuing interest in BEA. According to Ellison, Oracle plans to keep going with this strategy into the future.

But how has Oracle managed to perform this kind of vertical expansion? On the CRM (customer relationship management) and ERP sides, PeopleSoft was notable long before its acquisition by Oracle for its penetration into financial services, for instance. For its part, JDE was big into manufacturing.

And that all points to yet another reason why Oracle wants to buy BEA. More customers in vertical markets. BEA just happens to be a highly active middleware player in at least a couple of dozen different verticals, including financial services, manufacturing, health care, government, and education, to name a few.

Yet even at a mere $6.6 billion, BEA would be a costly buy for Oracle, especially when you consider that Oracle's entire revenues for the second quarter amounted to less than that, or $5.3 billion.

BEA apparently wants more than $6.6 billion. And rumor on the street has it that BEA could be courting some other suitors, too. So we know that retaining the database crown is of value to Oracle. The question now is, how valuable? If Oracle ends up forking over $7 billion or more, even if Oracle's executives find themselves smiling...Microsoft's might also celebrate just a bit.

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