If Oracle Deal Crumbles, Would NetSuite See A Second Suitor?

With speculations mounting regarding the (un)likelihood of the proposed Oracle Corporation ORCL-NetSuite Inc N deal completion, the following question has begun to emerge: Who could woo NetSuite next?

Following Oracle’s warning that it may terminate its $9.3 billion acquisition if the unaffiliated shareholders of NetSuite do not tender their sufficient shares to its $109 a share offer, that question has gained a sizable voice.

Turning Sour: Extended Tender Expirations

“In the event that a majority of NetSuite’s unaffiliated shareholders do not tender sufficient shares to reach the Unaffiliated Tender Condition, Oracle will respect the will of NetSuite’s unaffiliated stockholders and terminate its proposed acquisition of NetSuite,” Oracle said in a regulatory filing.

The sword has been looming over the Oracle-NetSuite deal ever since major shareholder T. Rowe Price asked for $133/share for tendering its shares to the offer. Thus far, Oracle has been unwilling to raise the bar beyond $109.

There are 81.5 million NetSuite shares outstanding, with 37.6 million owned by Oracle CTO/Executive Chairman Larry Ellison and 40.8 million unaffiliated shares. As of October 6, the original tender expiration, 4.6 million unaffiliated shares were tendered, representing 11.2 percent of the unaffiliated shares.

Oracle has extended the tender offer to a final November 4 deadline and has set minimal tender hurdle of 50 percent plus unaffiliated shares or 20.4 million shares to consummate the deal.

Is A Third Party Even Likely To Emerge?

Since Ellison is one of the largest shareholders of NetSuite, it is unlikely for a third party even with deep pockets to pursue NetSuite if Oracle terminates the acquisition.

“Risk of a competing offer appears low. Risk to our view is that minority shareholders concede in light of N’s weak Q3 that ORCL’s offer is the most expedient despite reservations about not having a competing bid,” Bank of America Merrill Lynch analyst Kash Rangan wrote in a recent note.

Further, the declining fundamentals of NetSuite would make it tough to justify a higher price tag.

For the third quarter, NetSuite’s revenues of $244 million missed BofA estimate of $248 million and billings of $257 million also fell short of BofA’s $279 million forecast. Organic billings have decelerated rapidly from 24 percent in the first quarter to 22 percent in the second quarter and 16 percent in the third quarter.

Moreover, the company does not expect to achieve its 2016 revenue outlook of $955 million–$975 million and withdrew previous outlook.

“We noted N’s move to accelerate sales headcount about 40 percent had not been matched with consistent billings acceleration, which hovered about 30 percent in 2015 and now has dipped below 20 percent,” Rangan highlighted.

Amid fears over M&A collapse, NetSuite shares lost about 16 percent in October. Rangan, who has an Underperform rating on NetSuite, said the stock could trade as low as $68 if the deal falls through.

If Oracle buys NetSuite, it would strengthen its cloud base and the deal would be immediately accretive to Oracle’s earnings on a non-GAAP basis in the first full fiscal year after closing.

At the time of writing, NetSuite shares dropped 0.18 percent to $94.20, while Oracle shares were up 0.44 percent to $38.39.