Software // Enterprise Applications
09:30 PM

Buyers' Market

Seismic shifts are in store for the enterprise apps industry. Are you ready?

When Manpower Inc. CIO Richard Davidson heard about PeopleSoft's bid early last week to acquire J.D. Edwards & Co. for $1.7 billion, potentially creating the world's second-largest enterprise applications vendor behind SAP AG, he said, "Now Oracle has to do something." Oracle did, bidding $5.1 billion for PeopleSoft Inc.

The enterprise applications landscape could end up looking markedly different than it did a week ago, as the industry's consolidation shifts into high gear. Combined, PeopleSoft and J.D. Edwards would have approximately $2.8 billion in annual revenue, 13,000 employees, and more than 11,000 customers. If Oracle succeeds in its takeover, it will have about 25% of the enterprise apps market, second to SAP's 54%--and J.D. Edwards may become a target for other vendors with aspirations in the enterprise applications space. Oracle said that it wants to complete the PeopleSoft deal first, then decide whether to go forward with the J.D. Edwards acquisition.

Craig Conway -- Photo by Andrew Serban/Bloomberg News/Lando

Oracle's takeover bid is "atrociously bad behavior," says PeopleSoft CEO Conway.
Oracle CEO Larry Ellison, who said that PeopleSoft CEO Craig Conway approached him a year ago to discuss a possible merger of their companies, told analysts during a conference call last week that he's offering PeopleSoft shareholders a "much safer road" than the alternative: an independent PeopleSoft, whose revenue is already under pressure, branching out to compete more directly with Oracle and SAP, and increasingly against Microsoft, which has been steadily growing in the market through its own acquisitions. For its part, PeopleSoft says it approached Oracle last year about buying Oracle's applications business.

There was another high-profile acquisition last week. Once high-flying Baan Co. was picked up for $135 million by an investment group consisting of Cerberus Capital Management LP and General Atlantic Partners LLC. They will merge Baan with SSA Global Technologies, another enterprise resource planning vendor they own. With nearly $600 million in revenue and almost 16,000 customers, the combined entity will be one of the largest ERP vendors in the manufacturing sector.

Why all the consolidation activity? A depressed economy has made IT executives tight-fisted and less inclined to buy loads of new enterprise software. "The license revenue has just gone down for everybody, and for a lot of players it's been difficult just to keep their heads above water," says Bryan Funkhouser, a partner at consulting firm Deloitte & Touche. The quickest route to new customers--and more revenue--is through acquisition.

Larry Ellison -- Photo by Noah Berger/Bloomberg News/Landov

Oracle would support PeopleSoft's software but not offer it to new clients, Ellison says.
In a statement, PeopleSoft's Conway called the takeover play "atrociously bad behavior from a company with a history of atrociously bad behavior." Executive VP and CFO Kevin Parker says it's "clearly a defensive strategy born out of the PeopleSoft and J.D. Edwards merger." Oracle's offer of $16 per share--just a 5.9% premium over PeopleSoft's closing price on June 5--makes it unlikely that shareholders will accept the deal, says Yankee Group senior analyst Mike Dominy. Oracle's low-ball offer highlights the low-growth prospects in the application market, according to an E-mail brief issued by UBS Warburg analyst Heather Bellini.

It will likely be weeks before the Oracle bid is resolved. If Oracle fails, PeopleSoft will gain 6,500 customers with its buy of J.D. Edwards and "an opportunity to [take] product advantages from each company and propagate them in each company's traditional markets," Conway says.

Photo of Craig Conway by Andrew Serban/Bloomberg News/Lando
Photo of Larry Ellison by Noah Berger/Bloomberg News/Landov

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