What was expected as a smooth transition is not running to plan. The acquisition of NetSuite by Oracle has been hit by delays and opposition. Can Oracle overcome the new hurdles placed in front of them?
First the delay hurdles
Late last week Oracle issued a press release, stating that the tender offer is extended to October 6th. This is bad news for NetSuite as it extends the period of uncertainty about the company. It is about to begin its Autumn roadshows, one in Sydney, Australia, and one just after the new deadline, in London. The original date for completion of Oracle buying NetSuite was 15 September. The delays, according to the press release are to “facilitate the review of the tender offer and the proposed acquisition by the Antitrust Division of the Department of Justice and the Cyprus Commission for the Protection of Competition.”
So why the delay? It appears that not all the investors are on the Oracle page, and will vote against it. Whether this in itself will be enough to sway the antitrust division is debatable, but it is a hurdle that also needs overcoming.
The opposition hurdles
Opposition comes in the form of investment firm T. Rowe Price Group. They are not insignificant, as after Larry Ellison (who owns 40% of the NetSuite shares) they are the next largest stockholder. This is important, under the terms of the acquisition, it needs a majority of those shares not held by Larry Ellison and his family, to agree to the terms. Effectively T. Rowe own almost one third of the voting stock and could have a considerable influence on the result. In an open letter to shareholders they put forward five perspectives about their opposition.
On reading the letter they do not appear to be against the acquisition going through itself but against the price tendered. The letter concludes: ” At $109 per share, our preference is for NetSuite to remain independent.” The basis of their objections are interesting. They believe that Oracle have failed to value the synergies between the two companies in their valuation. They believe, following a conversation with Zach Nelson, CEO at NetSuite that initial discussions anchored the price point. Apparently initial informal talks, priced the deal between $100 -$125. T Rowe believe that the mid-point was reached after negotiation rather than any investigations.
They also believe that the long term value of NetSuite should be higher. They believe that NetSuite should be valued more highly than Workday, finding them to be the closest comparison. This is because the target market is larger and Workday is hampered by its shares split. A share split that stops Ellison buying Workday in the same way he acquired PeopleSoft.
The way forward
There is one statement that infers a value is impossible to reach without a neutral third party valuation. The letter further states “In our view, the inherent conflicts of interest among NetSuite, the Ellison entities and Oracle are daunting and may be impossible to manage.” If this is what they are after it could defer the acquisition. That would add uncertainty to NetSuite’s future and would not be good for either party. No one has yet been able to measure the impact of this deal on sales by NetSuite. That might change the longer this goes on.
Some observers are skeptical about the union. NetSuite is generally admired and liked by the mid-market. Oracle is seen as arrogant and certainly has a reputation that is probably undeserved there. A merger might drag the love for NetSuite down to a similar level that Oracle doesn’t enjoy, so to speak.
While the investment company is against the sale currently. They do not appear to rule out supporting a higher bid by Oracle. If they believe shares are undervalued they could subsequently launch a lawsuit. To claw back the potential loss of gains that they might have had. There is an inference they are not happy with the share price negotiations carried out between Oracle and NetSuite. If other investors agree with their view then they will add further delays to the deal. Ironically the one person who will have a secret smile might just be Ellison. Any increase in the share price means that his personal fortune just gets even bigger.
Ellison was not part of the negotiating team on either side and was at arms length during the process. Perhaps T Rowe are looking for Ellison’s business in the next few years. They are certainly living up to one of their guiding principles: “If we take care of our clients, they’ll take care of us.”