Glad I didn't short PeopleSoft!

I suggested back in September that shorting PeopleSoft would be a pretty good risk. I was horribly wrong. Anyone who tried it would have lost about $7.15 a share. That would be an annualized loss of about 7% (depending on commissions). In short, it was a terrible investment idea.

According to Larry Ellison some of PeopleSoft's ongoing revenue was better than Oracle had estimated. I sure hope so, because it's difficult to see how this deal makes sense otherwise. I've had 18 months to ponder this and it seems to me that the only way this deal works in Oracle's favor is if they can retain PeopleSoft's revenue and cut the fat. Using Quicken's intrinsic value calculator:

Revenue (TTM)            = $2.67 (billion)
Assumed operating margin = 20%
Assumed operating income = $0.534(billion)
Assumed growth rate      = 5%
Discount rate            = 11%
Intrinsic value          = ~$25

It appears Oracle is overpaying about $1.50 a share.

I've had to make a ton of assumptions, which presumably Oracle management didn't have to do. For instance, maybe there are more costs that can be cut or perhaps there are deals in PeopleSoft's pipeline that we don't know about. But the possibility exists that Oracle was over-eager to get the deal done. It's troubling that the final price is just 50¢ more than the previous high bid, because it seems like a face-saving device for the PeopleSoft board, rather than a robustly calculated number. Also, Ellison pointed out that he didn't really see anything that surprised him in the PeopleSoft numbers, just that he didn't have to be so conservative in his estimates. We have a strong tendency to see the things we want to see.