M&A

Why Oracle Spammed PeopleSoft

What's behind the unsolicited bid for PeopleSoft -- and what the hostility means for the ERP industry.
John GoffJune 19, 2003

Don’t look now, but the M&A landscape is starting to heat up in the tech sector.

With stock prices on Nasdaq on the rebound, it appears that technology companies are ready to go get other companies while the go-getting’s good.

On June 4, personal digital assistant maker Palm Inc. announced it is acquiring rival Handspring in an all-stock deal valued at about $170 million. A Palm/Handspring duo should have a better chance of competing in the PDA space with large rivals such as Dell, Hewlett-Packard, and Sharp. And the acquisition moves Palm into the PDA/cell phone space, which some see as the future of handheld computing. By acquiring Handspring, Palm acquires Treo, Handspring’s popular PDA/cell phone combo. The announcement also helped boost both Palm and Handspring’s share prices by about 14 percent

Of course, the deal everybody’s talking about is Oracle’s unsolicited bid for ERP rival PeopleSoft, which, depending on who you listen to, is either 1) the greatest tech strategy ever conceived, or 2) the investment banking equivalent of spam.

In case you’ve been in a nunnery lately, here are the details: Oracle came in with a surprise $5.1 billion, all-cash offer for PeopleSoft on June 7 — just five days after PeopleSoft announced it was acquiring mid-sized ERP specialist J.D. Edwards for $1.7 billion.

Apparently, PeopleSoft CEO Craig Conway was not amused by the $16-per-share offer from Oracle CEO Larry Ellison. In an interview with Dow Jones just days after Ellison announced the offer, Conway labeled Oracle’s last-minute bid “atrocious bad behavior from an atrociously bad company.” He should know: Conway worked at Oracle for eight years.

In the interview, Conway also said directors at the Pleasanton, Calif.-based PeopleSoft were appalled by Oracle’s action. “It’s like having a wedding and [Oracle CEO] Larry [Ellison] showing up with a shotgun trying to get someone to marry him,” he said. At one point, he told Dow Jones that “people will see through this for what it is: a ludicrous concept with malicious intent.”

While such a response might be the PeopleSoft CEO’s way of meeting his fiduciary responsibility to shareholders — that is, driving up the offer price — the hostile bid was not enthusiastically received by J.D. Edwards’ management, either. That’s not surprising, since the takeover attempt not only put the PeopleSoft/Edwards deal on hold, but overshadowed all the positive press J.D. Edwards management had been receiving for agreeing to the merger in the first place.

J.D. Edwards CEO Bob Dutkowsky claimed Oracle’s bid for PeopleSoft could possibly violate U.S. and European antitrust laws. “Oracle’s elimination of a competitor, its products, and their ongoing development would reduce customer choice and product support, and would leave many customers with greatly diminished options,” said Dutkowsky. “This harm to customers is exactly what antitrust laws are intended to protect against.”

Certainly, regulators at the FTC will take a long hard look at the Oracle bid — as well as PeopleSoft’s offer for J.D. Edwards. That last point may have escaped PeopleSoft’s management, which last Friday looked to win over shareholders at J.D. Edwards by sweetening its all-stock offer to a half-stock, half-cash offer.

J.D. Edwards stockholders may need some winning over. While the company’s management has been singing the praises of the PeopleSoft merger, the fact is, shareholders may be more than a little spooked at the thought of being acquired by a company that might be acquired itself — and by the dreaded Oracle, no less.

Hoops, Skirts

At the same time, tech-watchers and Oracle stock holders (I fit both those categories) are still trying to sort out what’s behind Ellison’s seemingly machiavellian pursuit of PeopleSoft. Generally speaking, unsolicited bids are verboten in the software world. As SAP board member Leo Apotheker told The Financial Times last week, “Software companies do not make hostile bids. Execution is very difficult.

Then again, it appears that Oracle is interested in a different sort of execution. In its bid for PeopleSoft, Ellison & Co. made it clear that Oracle would continue to service PeopleSoft products — but would not likely bring out new versions of PeopleSoft applications. In other words, bye-bye PeopleSoft.

Such a strategy speaks volumes about the difficulties ERP players are having growing their businesses. As Paul Birch, CEO of business software maker Geac, points out, “Oracle’s bid is an admission that it’s easier to acquire customers than win them over in the new sell-cycle.”

Why is that? Well, for starters, Birch says “there’s a saturation of the high-end ERP market.” Further, ERP rollouts are so costly — and often so protracted — that corporate customers aren’t generally willing to go through the painful process very often. In fact, many users seem willing to jump through hoops to stick with their ERP systems. They’ll tweak the software, or upgrade it, sometimes they’ll even reinstall it — anything to skirt another deployment.

Moreover, a CFO who signs off on a large ERP rollout isn’t real likely to recommend a switch to another vendor’s product two years down the line. That, too, makes it hard for ERP vendors to win over new customers.

All this resistance to change has made it difficult for the Redwood Shores, Calif.-based Oracle to gain a real foothold in the enterprise software sector. Purchasing PeopleSoft would remedy that problem. Says Betsy Burton, a vice president and research area director in Gartner’s Research group: “This isn’t a tech acquisition. It’s a land grab.”

First, Kill All the Vendors

Others agree. Some observers say an acquisition of PeopleSoft — and its highly regarded technology — could help Oracle substantially improve its own business software offerings. In that sense, Oracle’s all-cash offer can almost be seen as an R&D investment — rather than an acquisition. Some analysts note that, with PeopleSoft technology in tow, Oracle would finally be in a position to challenge market-leader SAP.

Maybe. The deal would certainly help offset Oracle’s declining share of the database market. As reported in Tech Strategies last week, IBM garnered a 37 percent share of the database market last year, while Oracle slipped to a 27 percent share. Microsoft, which has been picking up ground on the top two, holds about a 19 percent share of the database market.

Any shrinkage of its database market has got to worry Oracle management. Ditto for a merger of PeopleSoft and J.D. Edwards — a marriage that would knock Oracle to number three in the enterprise software market. If Microsoft pulls off another acquisition — the company acquired Great Plains Software in 2001 and Navision in 2002 — Oracle might find itself number staring up from the number four spot.

Which brings us back to Ellison and his bid for PeopleSoft. Ellison knows full well there are simply too many software companies out there right now. What seemed like a quaint notion during the new economy (the Anyone-Can-Start-A-Software-Company corollary) has turned into a pain for vendors and customers.

The raft of software makers has created an army off under-capitalized, over-aggressive software vendors. According to a report in the Contra Costa News, about 70 percent of publicly held tech companies have a market cap under $250 million. This everyboudy-into-the-equity-pool mentality has also led to a glut of products on the market.

That’s a problem. The overabundance of relatively small software companies has tended to overwhelm the folks who buy the stuff (read, corporate executives). It’s also created something of a bonanza for consultants, who spend a whole lot of time trying try to link dozens of front-office and back-office apps for corporate clients. And guess who pays for all this linking?

Ante-Uppers

Interestingly, observers say the timing of the Oracle offer, which was voted down by PeopleSoft’s board this week, could work in Ellison’s favor.

First off, PeopleSoft will soon be releasing its second quarter results. If those numbers aren’t great — and some observers say that may be the case — then Oracle’s bid might look pretty good to PeopleSoft shareholders. Moreover, as Geac’s Birch points out, the offer “could make it tough for PeopleSoft to close deals in the third quarter.”

Even Conway seemed to be conceding that point in an open letter to PeopleSoft customers. In it, he wrote: “The calculated approach to disrupt our business assumed a dramatic slowdown in customer purchases. Don’t let it happen. Show your support for PeopleSoft by moving ahead with your planned purchases of PeopleSoft products this month.

In the meantime, other ERP vendors are looking to coin it off the Oracle/PeopleSoft/J.D. Edwards soap opera. Reportedly, SAP is launching a global marketing campaign that trumpets that company’s stability. And on Tuesday, SunSystems (part of the Systems Union Group) announced it will be offering PeopleSoft Assist — a migration package for PeopleSoft customers “designed to ensure that global businesses do not suffer any interruption to their business continuity or any damage to… their financial and business data as a result of this upheaval in the marketplace.”

There figures to be more “upheaval” before this is all over. PeopleSoft recently amended its merger agreement with J.D. Edwards, effectively voiding the need for a shareholder vote on the proposed marriage. The company also filed a lawsuit against Oracle, alleging unfair business practices.

Oracle responded on Wednesday by filing a lawsuit to stop the proposed PeopleSoft/Edwards merger. The company then promptly upped its offer to $19.50 per share. That’s a 14 percent premium over the closing price of PeopleSoft shares on Tuesday — and a nearly 30 percent bump up in PeopleSoft’s stock price since the announcement of Oracle’s initial cash offer. PeopleSoft’s board of directors promptly rejected the sweetened offer.

Oracle management claimed it came up with the new number based on discussions with PeopleSoft shareholders. Said company CFO Jeff Henley: “We expect that a majority of shareholders will immediately contact PeopleSoft’s board and demand the opportunity to accept our offer.”

Apparently, some folks like shotgun weddings.

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