Why Ultimate Software Is The Big Winner If NetSuite's Oracle Deal Fails

The ongoing uncertainty over Oracle Corporation ORCL’s proposed acquisition of Netsuite Inc N leads to another question as to what companies will benefit from the potential fallout of the merger.

MKM Partners’ Kevin Buttigieg says The Ultimate Software Group, Inc. ULTI is likely to be the prime beneficiary in the event of the potential collapse of the deal, as concerns of disruption to its NetSuite partnership ends. For context, shares of Ultimate Software shares fell 7 percent and closed down 4 percent the day the NetSuite deal was announced.

Moreover, the Buy-rated Ultimate Soffware itself is speculated to be Oracle’s takeover target, in addition to ServiceNow Inc NOW and Splunk Inc SPLK, should the NetSuite deal fall off. MKM rates both ServiceNow and Splunk at Neutral.

The analyst believes NetSuite shares would fall to the low $70’s range if the deal collapses.

“So potential share downside from $90 (22 percent) appears relatively balanced with potential upside to $109 (21 percent) though the short term binary nature of this event will likely make it unsuitable for many investors, in our view,” Buttigieg wrote in a note.

Meanwhile, the final extension for Oracle's tender offer for NetSuite expires Friday and Oracle is unlikely to raise its $109/share, which the company is its "best and final" offer.

Further, T. Rowe Price, who holds about 35 percent of the unaffiliated shares, cannot prevent the deal by itself and other shareholder has publicly opposed the deal. As such, the analyst believes the likelihood of the deal closing is likely better than 50 percent.

Although T. Rowe Price is demanding $133 a share, Oracle may not want to risk itself by raising the offer as it would set a precedent for the shareholders of its future targets to claim a higher second offer.

“[A]t 9x EV/sales, it is hard to argue that the offer undervalues N relative to other SaaS acquisitions (T. Rowe's case is based in large part on its perceived unique value of N to ORCL),” Buttigieg highlighted.

The analyst has a Neutral rating on NetSuite, with a fair value estimate of $109.

At time of writing, shares of NetSuite were almost flat at $89.19, while Oracle is up 0.52 percent to $38.23. Ultimate Software stock fell 0.72 percent to $209.02.