This is the research note from Merrill Lynch detailing the deal.
NEUTRAL Volatility Risk: HIGH
Investors should assume that Merrill Lynch is seeking or will seek investment
banking or other business relationships with the companies in this report.
Reason for Report: Company Update
Psft; $16.39; C-2-9
EPS (Dec): 2002A $0.60; 2003E $0.51; 2004E $0.59
P/E (Dec): 2002A 27.3x; 2003E 32.1x; 2004E 27.8x
GAAP EPS (Dec): 2002A $0.57; 2003E $0.47; 2004E $0.59
GAAP P/E (Dec): 2002A 28.7x; 2003E 34.9x; 2004E 27.8x
o PeopleSoft announced plans to buy software company J.D. Edwards for $1.7
billion in stock on Monday. The deal, which is expected to close late in the
third or early in the fourth quarter, will call for J.D. Edwards to become a
wholly owned subsidiary of PeopleSoft and J.D. Edwards shareholders will own
25% of the combined company.
o JDEC shareholders will receive 0.86 PSFT shares which trade at a 19%
premium at Friday's close. This represents a price of approximately 2x this
year's revenue estimate of $834 million.
o Positives in this deal are complementary vertical industries with PSFT
holding a leadership position in the service industries, healthcare and JDEC
finding success with the manufacturing, construction, CPG, and real estate
o From a product standpoint, the acquisition of JDEC fills the manufacturing
and supply chain hole that PSFT had.
o There is meaningful overlap in the products, however in CRM and in
o Although this could prove to be a good combination in the long term, we
still remain Neutral on the shares of PSFT due to the near term integration
risk inherent in a deal of this size, and the fact that we are not clear on
where the cost savings are going to come from at this point.
o The company stated that the deal would be accretive to earnings in 2004,
however, we aren't clear on how that could happen without having a negative
impact on the companies' R&D effort.
o PSFT shares currently trade at 28x our F04 estimate (backing out the cash
we get a multiple of 18x, which is at a discount to its peer group) and JDEC
shares trade at 46x or 42x when you back out the cash on our F04 estimate, of
o Risks include continued deterioration of the IT spending environment,
intense competition in the enterprise software market, and integration risks
associated with the proposed merger.
I, Jason Maynard, hereby certify that the views expressed in this research
report accurately reflect my personal views about the subject securities and
issuers. I also certify that no part of my compensation was, is, or will be,
directly or indirectly, related to the specific recommendations or view
expressed in this research report.
PSFT Price Table
Closing Investment 12-Mo.
Date Price Rating Price Obj. Analyst
01-APR-00 $20.000 Accumulate Shilakes
25-OCT-00 $45.125 Wood
31-JAN-01 $41.000 $60
29-NOV-01 $36.490 RVW
06-MAY-02 $20.230 Neutral NA Shilakes
10-FEB-03 $18.410 RVW
Prior to 8 Dec. 2001, the Investment Opinion System included: Buy, Accumulate,
Neutral, Reduce and Sell. From 8 Dec. 2001 to 6 Sep. 2002, the Investment
Opinion System included: Strong Buy, Buy, Neutral, and Reduce/Sell. On 8 Dec.
2001 Buy ratings became Strong Buy, Accumulate became Buy, and Reduce and Sell
became Reduce/Sell. On 6 Sep. 2002, Strong Buy and Buy ratings became Buy, and
Reduce/Sell became Sell. Any exceptions to these rating revisions are
reflected in the table. All price objectives for Neutral and Sell rated
securities established before 6 Sep. 2002 were eliminated as of that date. The
current Investment Opinion System is contained at the end of the report. RSTR
indicates security is restricted with the opinion suspended. RVW indicates
security is under review with the opinion withdrawn.
Investment Rating Distribution: Technology Group (as of 31 March 2003)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 50 26.32% Buy 10 20.00%
Neutral 126 66.32% Neutral 21 16.67%
Sell 14 7.37% Sell 2 14.29%
Investment Rating Distribution: Global Group (as of 31 March 2003)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 1027 42.02% Buy 358 34.86%
Neutral 1229 50.29% Neutral 304 24.74%
Sell 188 7.69% Sell 39 20.74%
* Companies in respect of which MLPF&S or an affiliate has received
compensation for investment banking services within the past 12 months.
(JDEC, PSFT) MLPF&S or one or more of its affiliates acts as a market maker
for the recommended securities to the extent that MLPF&S or such affiliate is
willing to buy and sell such securities for its own account on a regular and
(PSFT) MLPF&S or an affiliate expects to receive or intends to seek
compensation for investment banking services from this company within the next
The analyst(s) responsible for covering the securities in this report receive
compensation based upon, among other factors, the overall profitability of
Merrill Lynch, including profits derived from investment banking revenues.
OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating
and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price
fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS,
indicators of expected total return (price appreciation plus yield) within the
12-month period from the date of the initial rating, are: 1 - Buy (10% or more
for Low and Medium Volatility Risk Securities - 20% or more for High Volatility
Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk
securities - 0-20% for High Volatility Risk securities); 3 - Sell (negative
return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash
dividends, are: 7 - same/higher (dividend considered to be secure); 8 -
same/lower (dividend not considered to be secure); and 9 - pays no cash
Copyright 2003 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All
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GB;2071400 US;PSFT GB;PSFT0O US;JDEC GB;NWFX GB;JDEC0O
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Brian (F.K.A. Crazy)
“You can’t escape the responsibility of tomorrow by evading it today.”
“Blessed are the young, for they shall inherit the national debt.”