Toward an Imperfect Union

As the costly Oracle-PeopleSoft deal nears resolution, others may follow.
Anne StuartDecember 21, 2004

(Editor’s note: This article was reported before the Oracle-PeopleSoft deal was finalized, but its main point holds true: Customers of both companies have been and will continue to be affected in a variety of ways.)

It’s part soap opera, part high-tech celebrity death match — Silicon Valley’s answer to reality TV. As the finale approaches, few are willing to predict the ending, but many agree that however the Oracle-PeopleSoft story resolves, the IT industry will never be the same.

At press time — and that’s an important caveat — the fate of the Oracle takeover bid was in a judge’s hands, the case riding on the validity of certain poison-pill defenses adopted by PeopleSoft’s board of directors.

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Whether the judge decides those defenses can stand — which would almost certainly make the deal cost-prohibitive — or must be removed, there’s little doubt that customers, competitors, and the larger enterprise-solution vendor community are already feeling the effects of the standoff. The fight has set the stage for a potential wave of mergers and acquisitions throughout the high-tech industry.

That may well be what Larry Ellison, Oracle’s flamboyant CEO, had in mind all along. Several weeks before Oracle began its quest for PeopleSoft, Ellison publicly predicted a massive wave of consolidation that he said would eliminate about 1,000 high-tech companies, leaving a few giant category-killers, presumably including his own company. The scenario, he told the Wall Street Journal, “is the end of Silicon Valley as we know it.”

For the past 18 months, Oracle — which was initially best known for its database software but now makes a wide range of business applications — has aggressively pursued PeopleSoft, a software company that expanded from its initial base in human-resources software to join Oracle and SAP as a giant in the enterprise resource planning (ERP) market.

The saga began in June 2003 (see “The Battle, Blow by Blow,” at the end of this article), when PeopleSoft, which then had $1.9 billion in revenues, announced plans for a friendly acquisition of Denver-based J.D. Edwards, a smaller ERP player. Both parties’ boards approved the $1.7 billion deal, which created a combined company with $2.8 billion in revenues and more than 11,000 employees. More significantly, it allowed PeopleSoft to describe itself as “the world’s second-largest provider of enterprise application software,” after SAP in Germany.

Days later, Oracle, which holds the number-three position in the market, stunned the business world with its takeover effort. Analysts speculated that Oracle was more interested in PeopleSoft’s customer list than its products. Oracle confirmed that suspicion by saying it planned to discontinue PeopleSoft’s products, although the company pledged to continue supporting existing PeopleSoft customers. Still, Oracle executives presented the deal, ultimately valued at $7.7 billion, as mutually beneficial. “The acquisition of PeopleSoft will immediately make Oracle an even more profitable and competitive company,” said Ellison at the time. Oracle CFO Jeff Henley added, “Given PeopleSoft’s current prospects and plans, we believe our offer presents compelling value to PeopleSoft shareholders.”

To say that PeopleSoft disagreed would be like saying that Mothra was not particularly chummy with Godzilla. The dispute escalated quickly and dramatically. Then-PeopleSoft CEO Craig Conway, a former Oracle executive, denounced the takeover attempt as “horrifically unprofessional,” compared Ellison to a schoolyard bully, and charged that Oracle was simply trying to disrupt the J.D. Edwards deal. In quick succession, PeopleSoft twice rejected Oracle’s overtures, filed suit against Oracle in a California state court seeking $1 billion in damages, and completed the J.D. Edwards acquisition.

The U.S. Department of Justice stepped in, filing suit to block Oracle’s effort, calling it a threat to fair market competition. Oracle’s lawyers argued that the company needed to purchase PeopleSoft to compete with other large vendors, particularly Microsoft (see “When It Rains…,” Fall). But in September, Chief Judge Vaughn Walker of the U.S. District Court in San Francisco ruled against the government, leaving Oracle free to continue its pursuit of PeopleSoft. A few weeks later, federal regulators announced that they wouldn’t appeal the ruling. That same day, PeopleSoft’s board of directors fired Conway, citing a lack of confidence stemming from his handling of the Oracle fight, and called company founder David Duffield out of semiretirement to serve as CEO.

A resolution seemed at hand, but last month, a Delaware court began hearing arguments on Oracle’s request to invalidate two PeopleSoft antitakeover programs. Meanwhile, last month the European Commission said it would not attempt to block the deal or impose any conditions on it, thus removing the last regulatory hurdle. But PeopleSoft’s $1 billion lawsuit against Oracle remains unresolved, with a jury trial scheduled for January. And, of course, Oracle must still convince PeopleSoft’s board and shareholders to accept its offer. That effort could become even more challenging, since over time, Oracle has shaved more than $2 billion off its initial offer, citing PeopleSoft’s declining stock prices, and warned that its bid could decrease even more. As of October 26, PeopleSoft’s board maintained that the $21 per share Oracle was offering was too low.

Despite those remaining hurdles, a gambit that seemed outrageous in mid-2003 now seems increasingly likely to succeed. Many analysts say PeopleSoft’s options narrowed after the government lost its case. “We believe the pressure has increased on PeopleSoft’s board to seriously consider Oracle’s $21-per-share offer and negotiate in good faith,” Brent Thill, a securities analyst at New York-based Prudential Equity Group, wrote in a research note published after Walker’s decision. After ousting Conway, the merger’s most vehement and vocal opponent, even PeopleSoft’s board seemed increasingly resigned to fate. During the poison-pill trial, two directors indicated for the first time their willingness to negotiate — if Oracle offered a better price.

The feud is far more than fodder for the business pages and a case study for future MBAs. Customers have been and will continue to be affected in a variety of ways. Oracle says it has spent more than $60 million on its takeover attempt, while PeopleSoft claims to have spent more than $70 million fighting it. In September, a report by market-research company Techtel Corp. in Emeryville, California, said Oracle’s corporate reputation was at its lowest point in 12 years, presumably due to the PeopleSoft battle. (Fewer than 50 percent of the 765 corporate IT buyers surveyed by Techtel in July said they trusted Oracle; in comparison, 90 percent had high opinions of IBM.) Meanwhile, PeopleSoft reported a 70 percent drop in second-quarter profits, which company officials attributed primarily to buyers frightened off by the takeover attempt.

In fact, the only party that is currently benefiting from the battle is SAP, which reported a 63 percent increase in U.S. licenses during the second quarter. “I’ve heard there’s dancing in the streets in Walldorf,” quips Meta Group analyst David Yockelson, referring to SAP’s German headquarters.

Both Oracle and PeopleSoft have worked hard to reassure customers during the fray. “Our aim is to support PeopleSoft products just as if they were Oracle products,” Oracle tells PeopleSoft customers in a dedicated section of its public Website. The company promised it wouldn’t force its rival’s customers to migrate to Oracle products, but also notes that “Oracle has every incentive to ensure PeopleSoft customers are happy and satisfied because Oracle wants the opportunity to sell them more products and services.” In September, PeopleSoft announced a major new $1 billion multiyear deal with IBM. Under the agreement, PeopleSoft will standardize its applications on IBM middleware with the goal of creating a more-flexible and adaptable platform for PeopleSoft customers.

Analysts have, in general, urged both current and potential PeopleSoft customers to remain cautious about new investments for the time being. “PeopleSoft customers must learn to live with a level of uncertainty regarding the future of their software applications and maintenance services,” says Paul Hamerman, an analyst at Forrester Research. He recommends that companies upgrade to current versions of all PeopleSoft software, both for increased reliability and stability and because later versions will likely receive the best ongoing support.

“Essentially, Oracle has not yet stated its formal and specific intentions for the PeopleSoft and J.D. Edwards product lines,” says Yockelson, adding that J.D. Edwards customers are in the most precarious position. “If I were considering a PeopleSoft purchase or migration or an upgrade, the lack of specificity would give me pause.”

However, he and other analysts say that customers using PeopleSoft’s customer relationship management and finance software can be reasonably certain that however the battle plays out, those applications will be supported going forward.

If the takeover bid should fall apart, PeopleSoft will remain attractive to other potential buyers because, in addition to its customer list and other assets, it has plenty of cash on its balance sheet, analysts note. There is no obvious white knight at present, but many predict that economic forces, combined with federal approval of a (theoretical) Oracle-PeopleSoft deal, will pave the way for significant merger-and-acquisition activity in the IT world in the months ahead.

Anne Stuart is a Boston-based freelance writer whose specialties including business, technology, and law.

The Battle, Blow by Blow

June 2003: PeopleSoft announces plans to acquire J.D. Edwards in a $1.7 billion deal approved by both companies’ boards. Oracle launches unsolicited bid for PeopleSoft, initially at $16 per share, or about $5.1 billion, then at $19.50 per share, or about $6.3 billion. PeopleSoft’s board rejects the offers. PeopleSoft files a suit in a California state court accusing Oracle of damaging PeopleSoft’s business and seeking $1 billion in damages; a jury trial is later scheduled in January 2005. The U.S. Department of Justice begins an antitrust investigation.

October 2003: Assisted by the J.D. Edwards purchase, PeopleSoft exceeds its third quarter forecasts.

January 2004: Oracle nominates five candidates for election to PeopleSoft’s board in an effort to revoke the company’s poison pill, or antitakeover provisions.

February 2004: Oracle raises its offer to $26 per share, or $9.4 billion. PeopleSoft’s board recommends that shareholders reject the bid. The Justice Department says it will file suit to block Oracle’s bid, claiming it will hurt competition in the $710 billion enterprise software market.

March 2004: European regulators express concerns about Oracle’s takeover effort. PeopleSoft shareholders reelect current board members after Oracle drops its slate of nominees.

May 2004: Citing a 28 percent drop in PeopleSoft share prices since January, Oracle reduces its offer to $21 per share, or $7.7 billion.

June 2004: The Justice Department proceeds with its antitrust trial

July 2004: Blaming the takeover battle, PeopleSoft reports a 70 percent drop in second-quarter profits and says it will miss current sales targets.

September 2004: In a 164-page ruling, a federal judge in San Francisco clears the way for Oracle to proceed with its takeover bid, rejecting the government’s claim that the deal would impede competition. Both companies’ share prices rise following the news.

October 2004: The Justice Department announces it won’t appeal the judge’s ruling. The PeopleSoft board fires CEO Craig Conway, citing loss of confidence, and appoints company founder and chairman David Duffield to the job. Oracle indicates it may further reduce its price-per-share offer. A Delaware court begins hearing Oracle’s request for a ruling to invalidate PeopleSoft’s poison-pill defenses. In testimony, two PeopleSoft directors indicate willingness to negotiate with Oracle for the right price.