Oracle/Hyperion merger

With our investment in Longview Solutions, any BI deal causes a bit of excitement. Here is Scotia Capital’s software equity research analyst guru Paul Steep on the big business intelligence deal of the day:

“Oracle’s acquisition of Hyperion significantly improves the Oracle’s positioning in the BI/BPM market providing it a leading position in BPM and a strong BI suite.

What It Means
? We believe that the Oracle Hyperion combination is positive for Oracle and represents a major competitive threat over the long-term to the remaining independent BI vendors. Our expectation is that the independent BI vendors will have a one- to two-year opportunity as Oracle seeks to integrate the Hyperion product set.
? Our view is that Cognos is likely to have a modest advantage over Business Objects in the next round of M&A. However, we note that with limited buyers left (e.g., IBM, HP, SAP) valuation premiums are likely to be contained relative to the multiples paid for Hyperion.
? Rebalancing recommendations on BI stocks. We are increasing our recommendation on Cognos to 2-Sector Perform and Hyperion to 4-Tender based on further anticipated M&A activity within the sector.

Hyperion adds meaningful strength to Oracle
? Our view is that Oracle’s acquisition of Hyperion instead of other BI vendors is driven by a number of key synergies: ability to push Oracle to the leadership position in the finance budgeting and planning application
markets; a new product suite that is gaining momentum in the BI market, a solid legacy base of Essbase customers and physical proximity to Oracle’s facilities. Our belief is that Hyperion’s work to turn around the Brio assets and build a credible BI suite is a key asset that Oracle should be able to leverage.

Our view is that further potential share price appreciation exists for Business Objects and Cognos based on the current market values. We believe that a limited number of large potential buyers remain in the market including IBM, Hewlett Packard and SAP that are likely to pursue Business Objects or Cognos. However, our view is that
the range of potential take-out values for Business Objects and Cognos are likely to be based upon lower multiples than the Oracle Hyperion transaction based on power shifting to buyers.
? We are increasing our one year target price on Cognos based on shifting our valuation method to a price/earnings basis given the potential for further M&A activity within the sector. Our Cognos target of $44 per share is based on a 21x multiple on our F2008 EPS estimate (previously 19x) that includes a 2x multiple premium for potential as a takeover candidate. We believe that Cognos’ valuation is supported by an underlying fair value (i.e., not including any takeover premium) using a discounted cash flow that provides a range of values from $39.00 to $43.00 per share.
? We believe that operational and valuation risks remain for both Cognos and Business Objects over the longer term in the absence of acquisition by a larger vendor. Over the next year, our expectation is that Oracle will
remain largely distracted with integrating Hyperion’s operations. Our view is that concerns over increased competition from major vendors (e.g., Oracle and Microsoft) will remain a limiting factor to multiple expansion as investors worry about increased pricing pressure on new license transactions.

2007E 2008E
P/E 26.8x 24.5 x
EV/EBITDA 12.5 x 11.6 x
EV/FCF 15.7 x 15.3 x
P/Sales 3.4 x 3.1 x

Note – all estimates are based on Scotia calendar year estimates Source: Company reports; Scotia Capital estimates.”

MRM