In mid-December of 2012, Redwood City, California-based Oracle Corporation (NASDAQ:ORCL) announced its intention to purchase marketing software developer Eloqua Inc (NASDAQ:ELOQ) in a cash-for-stock deal valued at over $800 million. Although some concerns have been raised about the technology giant's offering price as well as the sustainability of Eloqua's revenue stream, the deal appears on track to close before the end of the second quarter of 2013. Careful investors may be able to take advantage of news-related dips to pick up temporarily-discounted Eloqua shares.
Oracle is a hardware, software, systems and database manufacturer that operates in a number of different technology sub-sectors. Key services include Internet connectivity solutions, the Java software development platform, a cloud services division and corporate IT support. Founder Larry Ellison continues to run the company's day-to-day operations. Oracle employs 115,000 people and earned $10.6 billion on $37.2 billion in revenue in 2011.
Through its proprietary Eloqua Platform, Eloqua offers cloud-based marketing support and revenue tracking services. Its complicated revenue and marketing analysis tools enable medium-sized businesses to track the efficacy of their marketing programs and devise solutions to problems that arise during the course of a geographical expansion or product roll-out. As a young outfit, the company has yet to demonstrate profitability on a consistent basis. Although its fortunes have since improved, it lost $90.4 million on $90.1 million in revenue in 2011.
How the deal is structured
The terms of this merger are straightforward. Oracle has agreed to purchase all of Vienna, Virginia-based Eloqua's outstanding shares for $23.50 in cash. Once this has occurred, Eloqua will cease to trade as a public company and will become a wholly-owned subsidiary of Oracle.
Prior to the announcement of the merger, Eloqua was trading in a tight range on either side of $18 per share. Investors who purchased the stock during this one-month period stand to earn a return of more than 30 percent on their investment. After the announcement, the stock has risen to trade near $23.50 per share. However, several news-related dips have pushed its price below these levels on an intra-day basis. Investors who purchase the stock on these dips may earn a premium of up to 5 percent.
In late October of 2012, Eloqua traded as high as $24.65 per share in anticipation of an earnings beat. Although the company's report was even better than market-watchers expected, it could not sustain these valuations due to relatively high short interest. As such, it subsequently dropped to its pre-announcement levels. Prior to its fall 2012 run-up, the company traded in a tight range near $14 per share following its early-August IPO. Eloqua's briefly-elevated valuations form the basis of a lawsuit that could complicate the proposed merger.
On Jan. 3 , news broke about a pending lawsuit by an activist Eloqua shareholder. Using language common to such suits, the brief alleges that Eloqua's executive team and board of directors abdicated their fiduciary responsibilities to ensure a fair takeover price for the company. It goes on to accuse board members of accepting a simple deal over one that values the company fairly.
Given that Eloqua's stock traded above $23.50 for just a few sessions and that the company has been public for less than a year, the merits of this suit are unclear. However, it is possible that it will force Oracle's board to raise its offer. If this is the case, Eloqua may be substantially undervalued at its current price point.
Alternatively, Oracle's board could well decide that it would not be worthwhile to file a higher offer. In this case, the company might drop its bid and send Eloqua's shares back down to their pre-announcement levels.