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As software companies fight it out, must customers pay the price?
John Verity, CFO Magazine
August 1, 2003
Jim Prevo, chief information officer at Green Mountain Coffee Roasters in Waterbury, Vt., understands why, early in the last century, the ranks of automobile makers narrowed from more than 100 to just a handful. Yet, as a similarly momentous consolidation looms over the enterprise software market, this longtime PeopleSoft customer is getting worried. And angry.
For car buyers, adapting to change was simple, he argues. "You could step out of your DeSoto and into a Chevy and be on your way." But for Green Mountain, he says, PeopleSoft's ERP software is analogous to a brain, a vital organ that powers everything from the general ledger to complex supply-chain and employee-benefits systems. "And what Oracle's saying is, 'We're going to keep your brain's function static for the rest of your life. Or, you can switch to our software.' " But switching to Oracle, or to a competitor, for that matter, Prevo says, "is the equivalent of performing a brain transplant. It's expensive, and it might kill us."
Unfortunately, Prevo is not alone in feeling as though his interests are playing second fiddle to those who own and run enterprise software companies. After years of growth and scores of new suppliers entering the market, a massive wave of consolidation appears to be under way. Simply put, "there are too many vendors and not enough paying customers," says Chris Selland, managing director of Cambridge, Mass.-based Reservoir Partners LP, a research and consulting firm focused on high-end software. "Oracle has just decided to get ahead of the trend."
Oracle's attempt to buy PeopleSoft is merely the most visible manifestation of an indisputable trend — one that, while often couched in terms of benefits to customers, will certainly cause plenty of disruption in the near term. "This has been an epiphany for me," says Prevo. "I suddenly realized that the public-capital model is in direct opposition to the interests of users. What I need is a stable technology platform so that my enterprise can change. But now there's a huge risk factor I never thought of. In private ownership, the owners have a different relationship to customers, a level of integrity and loyalty. But in the public model, the owners may see an opportunity to make 20 percent on their money and they'll say, 'Great, I'll cash out!' That's dangerous." Prevo, in fact, says that "if [Oracle] is successful" in acquiring PeopleSoft, "I will recommend to my board that we bring [software] development in-house."
That would be a bitter irony for growth-minded software companies, because their primary motivation for making acquisitions is to bulk up on customers. "This is a market land-share grab," says Betsy Burton, a Gartner vice president. "There's not much in the way of advanced function or technology that Oracle needs from PeopleSoft," she says. The two firms' ERP suites already overlap a good deal. But in addition to thwarting PeopleSoft's own plans to acquire J.D. Edwards, which PeopleSoft announced only four days before Oracle made its hostile bid for PeopleSoft, Oracle also needs to find new avenues of growth as its core database market matures. Given the right incentives to stick around, PeopleSoft's 5,000 commercial, academic, and government customers could generate substantial revenues and profits for Oracle for many years to come.
One irony is that customers' desire to deal with fewer and larger vendors is among the factors driving this new round of M&A activity. Even so, they are understandably wary. "We're very concerned about the investment we've made in our PeopleSoft software," says Ron Hinsley, vice president of IT at Kansas City, Mo.-based utility company Aquila Inc.'s Global Network Group. "At some point, [Oracle] won't be able to support two ERP systems. We may eventually be forced to upgrade to software we don't want."
The state of Connecticut, concerned about disruptions to its effort to implement PeopleSoft's software on a broad scale — a project reportedly worth $100 million — has gone so far as to sue Oracle for antitrust violations. Some observers see the charges as flimsy, but the suit illustrates the depths of despair that organizations can feel when the future of an important IT supplier is suddenly made uncertain.
The situation may not be all bleak for customers. For one, the continuing aggregation of disparate software products could solve a major technical problem for users, that of product integration. Corporations frequently spend more on getting different brands of enterprise software to exchange data smoothly than they do on the original licenses for those products. Made part of a software company's product family, those applications could become easier to install and use. And consultants say the time is ripe to drive for better deals, assuming customers can figure out how to balance lower purchase prices against the risks associated with a key vendor being acquired.
As this issue went to press, Oracle had been rebuffed twice by PeopleSoft but seemed intent on pushing ahead. Analysts were divided on whether the deal would go through and on what the resulting landscape would look like; many thought that even if Oracle failed, its bid would keep PeopleSoft in play for someone else. Amid the uncertainty, Prevo of Green Mountain was adamant: "I have absolutely no desire for this deal to go through. I figure it's a $10 billion to $20 billion price tag [Oracle CEO] Larry Ellison is forcing onto PeopleSoft customers — money that we could otherwise spend on delivering value to our customers and stakeholders."
Oracle has its own stakeholders, of course, as do many of the software firms on both sides of the M&A equation. Whether vendors' gains must equate to customers' losses remains to be seen, but it's clear that the buying of technology is now more complicated than ever.
"Tell Us We Shouldn't Worry"
Even if the Oracle-PeopleSoft deal should fall through, many companies will find themselves having the sort of meeting that Krispy Kreme Doughnuts Inc. held in early July. Ostensibly, it was a routine project meeting to address the deployment of newly purchased software from Comshare Inc. But between the time Krispy Kreme signed on for the software and the beginning of the actual rollout, Comshare was acquired by Geac Computer Corp., a company that has made several acquisitions of late as it attempts to augment its core back-office products with financially oriented front-end applications. "At this meeting we asked Comshare when the deal was expected to close," says Krispy Kreme CIO Frank Hood, "and they said August 1. We said, 'OK, we want someone here from Geac on August 2 to tell us why we shouldn't have to worry about this acquisition, why it will be a positive for us."
Buyer reassurance is the order of the day across the IT landscape, a fact not lost on Geac, which positions its recent acquisitions (it also bought Extensity, a maker of software for tracking travel and expense data, earlier this year) as vital to giving customers what they say they want: software that works with existing back-office technology and provides a quick payback. While Geac makes its own back-end applications, such as core financials (general ledger, accounts payable, and so on), it says it will create a set of integration products around its recently acquired products to allow them to work with a variety of back-office systems.
Hood has some trepidation about the Geac-Comshare deal, but says his bigger concern is the tumult in the ERP space. Krispy Kreme is in the market for a new ERP suite and had tentatively put J.D. Edwards on its short list. Should PeopleSoft remain independent from Oracle and proceed with its plans to buy J.D. Edwards, Hood would welcome that because he sees it as providing good synergy. But an Oracle acquisition of PeopleSoft sits less well with him, even though Oracle is also on the short list but PeopleSoft is not. "My concern is that the cost of that deal will be passed on to customers," he says. "No ERP migration is free. I'd rather see acquisitions made where there's real synergy between two companies," versus a deal motivated more overtly by a quest for greater market share.
It's a rare acquisition that doesn't feature the word "synergy" prominently in news releases, of course, but customers have seen enough deals go down in the IT world to know that stated rationales and postmerger customer experiences can vary enormously. —S.L.