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9/10/2004
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Analysts React To Oracle's Court Victory

Predictions include the unlikelihood of an appeals court overturning Judge Walker's decision and the deal finally closing at somewhere in the mid-$20s-per-share range.

Industry and financial analysts are reacting to the decision Thursday by U.S. District Court Judge Vaughn Walker, who sided with Oracle against the Department of Justice, ruling that Oracle's bid to buy PeopleSoft Inc. does not violate antitrust laws.

The Justice Department said Thursday it was considering its options. While an appeal is possible, Merrill Lynch analyst Jason Maynard issued a report saying that it's unlikely that an appeals court would overturn Walker's decision, given that the ruling "was emphatically in favor of Oracle and ripped apart nearly every argument presented by the DOJ."

While that might discourage Justice from making an appeal, Maynard notes that other major obstacles in closing the transaction are PeopleSoft's "poison pill" clause in its bylaws and whether or not the European Union would give a thumbs-up to the acquisition. Still, with Walker's clearance, the likelihood of the transaction closing increases. Maynard doesn't expect Oracle to raise the bid above $21 per share, which Merrill Lynch believes represents a fair offer to PeopleSoft. Because of the ruling in Oracle's favor, Merrill Lynch is raising its rating on PeopleSoft to neutral from sell.

Maynard says the ruling is good news for the software industry because it keeps the avenue of consolidation open. A victory by the Justice Department, he says, would have had a negative impact on other mergers and acquisitions.

Analyst Neil Herman at Lehman Brothers points out that if the EU doesn't make its own decision or resolve potential antitrust concerns with Oracle, within six weeks of Oracle reopening discussions with it, it could be years before the matter would even come to trial, effectively killing the deal. But Herman assigns a 60% probability that Oracle will surmount any appeals or antitrust obstacles raised by the EU. The deal, he expects, would be done at a final bid of somewhere in the mid-$20s per share.

At ARC Advisory Group, VP John Moore says PeopleSoft's board is unlikely to remove its poison-pill provisions for anything less than $26 per share. "There is also the potential that a white knight may arrive on the scene and scoop PeopleSoft from the clutches of Oracle, but few have the resources (or the desire) to do so," he writes. "Likely candidates would include IBM, Microsoft, and even SAP, but each of these also have reasons for not rescuing PeopleSoft."

Moore says that at the end of the day, the real winner is SAP, "who continues to do quite well selling into this confusion." Indeed, says analyst Jim Shepherd in a new AMR Research report, SAP will be the safest choice for application buyers, if Oracle succeeds in the acquisition, thereby accelerating the consolidation that's under way in the application market.

"This ruling has many implications for PeopleSoft customers," he writes. The uncertainty of the outcome already has affected IT deployment strategies and purchase decisions, and they might be delayed for some months more. J.D. Edwards' software customers should perhaps brace for Oracle selling that business, if it succeeds in its bid.

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