Will BEA Find Another Suitor?

As expected Oracle (ORCL)yanked its $6.7 billion offer for BEA Systems (BEAS). The big question is where BEA goes from here.

The Oracle-BEA saga has been plagued with back and forth letters in recent days. Oracle offered $17 a share for BEA. BEA said it wants $21. Oracle said go to hell. The deal expired and now BEA's billionaire investor is demanding that BEA put the Oracle offer up to shareholder vote. Icahn also warned about a proxy fight and potential lawsuit.

After Oracle’s offer expired Sunday night the software giant said:

BEA shareholders should not assume that Oracle will renew its $17 per share offer in the future. Over time many things can change: BEA’s business might materially weaken, the stock market can fall further from its recent record highs, or Oracle may have committed its capital elsewhere.

So where does this go from here?

Option 1: Icahn forces BEA to hold an auction of the company. This is highly likely, but it would be nice if BEA actually had up to date financial statements so a prospective buyer would know what it would be getting. Here’s what Icahn wrote in a letter to BEA:

BEA Systems

2315 North First Street

San Jose, California 95131

To The Board Of Directors Of BEA:

I am the largest shareholder of BEA, holding over 58 million shares and equivalents. I am sure that the BEA Board would agree with me that it would be desirable not to have to put BEA through a disruptive proxy fight, a possible consent solicitation and a lawsuit. This can be very simply avoided if BEA will commit to the two following conditions:

o BEA SHOULD ALLOW ITS SHAREHOLDERS TO DECIDE THE FATE OF BEA BY CONDUCTING AN AUCTION SALE PROCESS AND ALLOWING THE SHAREHOLDERS TO ACCEPT OR REJECT

THE PROPOSAL MADE BY THE HIGHEST BIDDER. BEA should not allow the stalking horse bid from Oracle to disappear (failure to take the Oracle bid as a stalking horse would be a grave dereliction of your fiduciary duty in my view). If a topping bid arises, then all the better. But if no topping bid arises it should be up to the BEA shareholders to decide whether to take the Oracle bid or remain as an independent Company - - not THIS Board, members of which presided over the reprehensible “option” situation at BEA, a Board that has watched while, according to Oracle in its September 20, 2007 conference call, Oracle’s Middleware business “grew 129% compared with the decline of 9% for BEA”.

o BEA SHOULD AGREE NOT TO TAKE ANY ACTION THAT WOULD DILUTE VOTING BY ISSUING STOCK, ENTRENCH MANAGEMENT OR DERAIL A POTENTIAL SALE OF BEA. We are today commencing a lawsuit in Delaware demanding the holding of the BEA annual shareholder meeting before any scorched earth transactions (such as stock issuances, asset sales, acquisitions or similar occurrences) take place at BEA, other than transactions that are approved by shareholders. AS WE STATED ABOVE, THIS LAWSUIT CAN EASILY BE AVOIDED.

Your recent press releases regarding Oracle’s proposal to acquire BEA indicate to me that you intend to find ways to derail a sale and maintain your control of the company. In particular I view your public declaration of a $21 per share “take it or leave it” price as a management entrenchment tactic, not a negotiating technique. BEA is at a critical juncture and it finds itself with a “holdover Board”. BEA has not held an annual meeting in over 15 months and has not filed a 10K or 10Q for an accounting period since the quarter ended April 30, 2006. Those failures have arisen out of a situation that occurred under the watch of many of the present Board members.

You should have no doubt that I intend to hold each of you personally responsible to act on behalf of BEA’s shareholders in full compliance with the high standards that your fiduciary duties require, especially in light of your past record. Responsibility means that SHAREHOLDERS SHOULD HAVE THE CHOICE whether or not to sell BEA. BEA belongs to its shareholders not to you.

Very truly yours,

Carl C. Icahn

BEA has since responded with yet another letter and said “we are currently exploring ways to maximize shareholder value, including the possible sale of the company. ” BEA then reiterated its $21 a share mantra.

Option 2: Oracle makes another offer. If this BEA auction plays out, Oracle could always return to the bidding with an offer of $18 or so. BEA’s board made a few miscalculations with this Oracle offer. First, the board assumed some other company would want BEA. Second, BEA countered Oracle with its “we’re worth $21” rambling. If BEA would have come back with a $19 maybe it could have worked something else out.

Option 3: Another buyer steps up for BEA. Would another buyer want BEA? Hewlett-Packard (HPQ), which has been building up its software assets, could be interested. IBM (IBM)is another possibility. However, neither company is going to pay $21 a share for BEA.

Option 4: BEA stays independent. This option is arguably the worst. As an independent company BEA is now wounded. This high profile bickering with Oracle is going to be front and center for any prospective BEA customer. Good luck countering that FUD. Meanwhile, BEA is competing with Oracle and IBM in middleware. BEA’s business is likely to erode. In other words, what was a $17 deal left on the table Sunday could be a $15 offer in the future.