NEW YORK (CNN/Money) -
PeopleSoft shareholders might be starting to wonder if selling out to Oracle wouldn't have been such a bad idea after all.
Shares of the software company have fallen 21 percent year-to-date. And at a current price of about $18, the stock is not only trading well below Oracle's $26 a share asking price, it is also lower than the $19.50 that Oracle was offering before raising its hostile bid in February.
At these levels, however, some investors are beginning to wonder if PeopleSoft has become a buying opportunity.
Stock looks cheap compared to rivals
To see if that's so, you first have to consider what's depressing the stock.
PeopleSoft (PSFT: Research, Estimates) develops applications software, which helps big businesses manage routine functions such as human resources and supply chains, and analysts have become less optimistic about the recovery in software spending.
Other software stocks have also taken a hit. Siebel Systems (SEBL: Research, Estimates) has plunged 23 percent this year. Oracle (ORCL: Research, Estimates), which wants to acquire PeopleSoft in order to boost its relatively small applications business, has fallen 14 percent. Industry leader SAP (SAP: Research, Estimates) is down about 10 percent.
Compounding PeopleSoft's problems is the fact that the Department of Justice is suing to block Oracle's takeover efforts. Even though PeopleSoft's board has adamantly refused to negotiate with Oracle since it launched its takeover bid in June, there was still some faint hope that a deal could get done.
But now, even if PeopleSoft Craig Conway had a sudden change of heart (not likely) and decided to agree to a friendly deal with Oracle, it's hard to imagine a merger getting approved by regulators. In addition to resistance from the DOJ, the European Union (which fined Microsoft for antitrust violations Wednesday) would probably frown on a deal.
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Given all this, it seems that arbitrageurs, investors who bet on takeover situations, have probably bailed on PeopleSoft stock, said Patrick Mason, an analyst with Pacific Growth Equities. And that appears to have created a decent buying opportunity.
"The stock has been beaten up too much. It's a good buy right here," said Mason.
PeopleSoft is trading at a noticeable discount to its rivals. The stock trades for 20 times earnings estimates, even though earnings are expected to increase by 44 percent this year and 16 percent in 2005.
By way of comparison, Oracle trades at 22 times calendar 2004 estimates. SAP has a P/E of 28 and Siebel is trading at 36 times this year's earnings projections.
Company should hit first quarter targets
Still, there are some concerns about whether PeopleSoft will be able to meet estimates for the current quarter and the rest of the year.
One concern is that sales have been boosted by a unique refund program that PeopleSoft instituted to fight off Oracle. Customers would receive large refunds in the event of a takeover and those costs would have to be covered by the acquiring company.
Mason said that the board may come under pressure to remove this program at its annual shareholder meeting on Thursday.
In fact, Glass Lewis & Co., a research firm that focuses on corporate governance issues, is recommending that PeopleSoft shareholders withhold their vote to reelect Conway to the board, mainly because of the refund program.
"While we are not passing here on the merits of Oracle's bid or the board's rejection thereof, we are taken aback by some of the strategies that Mr. Conway has implemented to fend off Oracle and buttress customer demand," the company said in a report.
Regardless of what PeopleSoft decides to do about the refund program, there will be increased pressure on the company to meet earnings and sales estimates in order to justify its go-it-alone stance.
According to First Call, analysts are expecting earnings of 18 cents a share for the first quarter, which ends in March. The consensus sales estimate is $646.5 million.
James Mendelson, an analyst with Schwab SoundView, said PeopleSoft should hit these targets.
"Despite a lot of angst, we don't see evidence that there is a problem. We remain convinced that there is a gradual recovery in IT spending," said Mendelson. He added that he thinks the sell-off in the stocks of PeopleSoft's competitors is a bit overdone.
Mendelson also said that PeopleSoft specifically has done a good job so far of integrating software from J.D. Edwards, which PeopleSoft acquired last year, and that it has been winning deals from small and medium-sized business customers. So given its discount, PeopleSoft looks particularly attractive, he said.
Analysts quoted in this story do not own shares of PeopleSoft or other companies mentioned and their firms have no investment banking ties to them.
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