NEW YORK (CNN/Money) -
Oracle's proposed $5.1 billion buyout of PeopleSoft sent the business software sector surging Friday morning, but the rally was short-lived.
Oracle's (ORCL: down $0.27 to $13.09, Research, Estimates) hostile bid came just a few days after PeopleSoft (PSFT: up $2.71 to $17.82, Research, Estimates) said it would buy another rival, J.D. Edwards (JDEC: up $0.41 to $13.20, Research, Estimates), for an all-stock deal valued at about $1.9 billion. The deal, should it go through, would pose a significant competitive threat to Oracle.
The news sent shares of PeopleSoft up 19 percent, as investors cast their bets that Oracle will likely sweeten the offer and that if it is willing to spend this kind of money right now, that must be a good sign for technology growth.
Initially, shares of other business software makers rallied as well. Siebel Systems (SEBL: up $0.19 to $10.98, Research, Estimates) shot up 13 percent and BEA Systems (BEAS: up $0.02 to $11.08, Research, Estimates) gained 11 percent, as investors scurried to get into other issues that might also be takeover candidates or could benefit from a smaller competitive landscape for enterprise software.
Siebel Systems had already seen a big share boost earlier in the week, on rumors that Microsoft could be a suitor, and investors swooped in on it again Friday for the same reasons. BEA Systems and a host of smaller names in the sector rallied as investors bet that if the PeopleSoft deal doesn't work out, maybe Oracle will turn its attention elsewhere, said Tad W. Piper, a software analyst at U.S. Bancorp Piper Jaffray.
But by midday, Siebel and BEA had drastically cut their advances. As trading drew to a close, Siebel was up a little over 2 percent and BEA was up less than 1 percent.
"We're going to have to see how the process goes next week when the offer starts to move forward more formally," Piper said.
Late in the afternoon, PeopleSoft issued a statement in which CEO Craig Conway called Oracle's move "atrociously bad behavior," and advised shareholders to avoid responding to Oracle until PeopleSoft could review the offer and advise them.
The comments had little impact on the stock, however, which remained sharply higher until the close.
"I think the stock jump in PeopleSoft today certainly tells you that investors have pretty clearly voted that $16 per share is not going to do it," Piper added. "Oracle may come back with a slightly better offer, but they are not going to chase this much."
If Oracle backs off altogether, stocks like Siebel and BEA could keep rising short-term on hopes that they will be looked at as takeover targets, Piper said. But, he said, long-term, there isn't much in the proposed deal that makes these stocks more or less compelling than they were Thursday.
Regardless of whether Oracle raises its offer, PeopleSoft's strong rise on the day also doesn't necessarily mean that the stock will see a continued surge. PeopleSoft's recent first-quarter report showed lower earnings from a year earlier that managed to scrape past analysts' lowered estimates. And a purchase of J.D. Edwards might leave the company short on cash.
This was why W.R. Hambrecht analyst Richard Petersen downgraded PeopleSoft stock at midday to "sell" from "hold" and cut his current-quarter forecast, saying that the Oracle deal is unlikely to go through. He noted that the stock that is going to benefit the most is probably Oracle, by making customers and employees of PeopleSoft and J.D. Edwards nervous about the risk of their just-announced merger.
Regarding hopes for a big stock rise, "My suspicion is that investors are just being foolish and will find themselves disappointed," said Morton Pierce, head of the mergers and acquisition practice at Dewey Ballantine, a New York-based law firm.
The rise in PeopleSoft Friday was also less impressive considering that the stock was down 17 percent year-to-date as of Thursday's close. That, during a time when many stocks in the tech sector have been rallying.
By contrast, Siebel Systems shares were already up almost 46 percent year-to-date as of Thursday's close.
Talk of an Oracle purchase has already had its effect on BEA Systems. The stock shot up 10 percent at the end of May on a rumor that Oracle might be interested in buying it. That never materialized and the stock was nearly unchanged from those levels as of Friday. Overall, it's down 3.6 percent year-to-date.
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