24/7 Wall St.

BEA Systems (BEAS-NASDAQ) is a name that just came back under fire yesterday after lowering its quarterly revenue projections.  The drop in the stock was not massive as estimates were $348+ million and the company guided to $342 to $347 million.  Shares closed down only 3% or more, but they had traded down over 10% early yesterday.  The licensing revenues are a disappointment: the guidance was as low as $111 million versus prior forecasts of $132 million. 

It is blaming the reorganization and saleforce realignment, but the likely issue is that Oracle (ORCL-NASDAQ) is taking more of the middleware market share away or that other competitors are winning.  The company also competes against H-P (HPQ) via H-P’s Mercury Interactive, SAP’s (SAP) NetWeaver, Tibco Software (TIBX), and IBM (IBM). You can now interpret that Salesforce.com (CRM) is more into the space than in prior years. BEA Systems has been a "rumored and speculated" takeover name literally back into the 1990’s and valuations were always in the way.  The balance sheet and income statements are both somewhat guesswork because BEA has been delinquent in filings over stock options and much of the current numbers are best ‘guestimates.’  If the balance sheet is still close to $900 million in tangible book value, we can at least take a stab at "valuations."

This has been a BAIT SHOP member in the past (of takover candidates) at much lower prices and before the options backdating was an issue, and has been removed because of valuations getting higher than a perceived buyer would have paid.  If the company is feeling more competitive pressures then it could finally decide to be more open to a deal.  That is most likely not yet the case.  The problem would boil down to the price: it would probably take close to $14.00 in today’s money as is for an "entry-level" bid that would keep the board from laughing a buyer out of the room.  This is one we have noted as needing to go lower and "staying lower" because of sales or industry pressure before management would be considered very vulnerable to a predator or before they would capitualte. 

Let’s take the warning a bit further to determine more conservative base-line forward valuations.  If we were going to price in competitive pressures and a slower environment and trim off 10% of earnings and revenues, then here is what the company would lool like in valuation (these numbers reflect a 10% discounting to forward street estimates): $0.55 EPS for JAN-08 fiscal year on revenues of $1.39 Billion; so forward multiples would come in at 20.5 times forward discounted EPS, 3.2-times forward revenues, and 17-times discounted cash flow from operations.  These levels aren’t exactly overvalued for a software company, but they aren’t good enough alone for a larger competitor to get a free assassination of a competitor.  They also might not be good enough without knowing what the real charges will end up being because of stock options, and it requires trusting the past financial data without current numbers being precise.

With a $4.45 Billion market cap today it is within the constraints of a doable deal.  The ‘unknowns’ probably still negate the "acquirable size."  Another problem is that the company has maintained that it wants to remain independent and a buyer might not be interested if the company begins implementing measures that could make the company less attractive.  As far as we are concerned, BEA Systems’ stock still needs to get current with the SEC and the stock needs to settle in at lower levels before we’d start looking at it as any serious takeover candidate with an actionable and hedged call. 

Jon C. Ogg
May 2, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.