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Oracle Prevails in Tender Offer

It's all over but the shouting in the PeopleSoft takeover. But what does the future hold for PeopleSoft customers?

VentanaView™

Summary

There may still be some twists and turns left in Oracle's attempt to acquire PeopleSoft. Yet, for those who have not already done so, it is time to start planning for a post-takeover environment. We advise companies that had been planning to purchase software from PeopleSoft to look elsewhere. Companies that rely heavily on PeopleSoft applications must secure the best contractual relationship possible at this point. Firms where PeopleSoft is not strategic should plan to migrate to something else within the next several years. Corporations with a mature and stable HR and financials environment should leave well enough alone for now and concentrate on software that supports initiatives to improve their compliance activities, manage innovation, and enhance profitability.

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After 17 long months, Oracle has taken a decisive step in its attempt to acquire PeopleSoft for $9.2 billion. The company states that it owned a majority (61%) of PeopleSoft's shares at the end of Oracle's latest tender offer period, which expired November 19. While PeopleSoft has a "poison pill" in place, it is possible that a judge in Delaware's chancery court will throw it out, enabling Oracle to acquire the remaining shares. Having a majority now enables Oracle to win any proxy fight it cares to mount, but since PeopleSoft also has a staggered board of directors, it may take two years for Oracle to take full control of the company. None of this should matter to PeopleSoft users because they should be focused on the long term, and it is highly probable in the long run that Oracle will wind up controlling the company.

Although the future is clearer today than before, there are still many unanswerable questions as to what the PeopleSoft installed base should expect from Oracle in years 1, 2, 3, and 4 following the close of the transaction. After some initial bellicose remarks from Chairman Ellison, the company has made it clear that it intends to support the installed base for several years. Since the devil is in the details, it is hard to know whether, and for which companies, this level of support will be adequate.

Companies that decide to go with Oracle and continue to pay maintenance must use this opportunity to extract as much in writing as possible. No doubt, regional and national users' groups will mobilize to organize efforts to mediate a go-forward relationship with Oracle. We expect they will provide users with specific advice on how to manage their own contract negotiations as well.

Regardless of what happens with the "poison pill" defense or proxy fights, Ventana Research advises all prospective buyers to put purchases on hold immediately and consider alternatives. We recommend that existing users consider their alternatives (stay with PeopleSoft with or without continued maintenance payments, or actively seek out another vendor) in a methodical and ongoing fashion.

Prospective new customers, existing customers implementing software or existing customers planning to upgrade their existing software should stop and find another long-term solution. We think that manufacturing organizations, especially those using software originally from JD Edwards, are particularly vulnerable to losing effective support and development efforts in a post-merger environment.

Corporations using multiple ERP vendors across their divisions should stop paying maintenance and begin planning to standardize the PeopleSoft business units on another vendor's software. PeopleSoft customers with mature, stable deployments do not have to do much for the moment. We suggest they re-examine their contracts to determine their position on adding users, servers, and other changes to their environment.

Existing PeopleSoft customers that are not fully up-to-date on maintenance releases may or may not be in a difficult position, depending on their circumstances. Those unable to address requirements without an upgrade may have to make the investment, but others are probably better off not spending the money and waiting until they need a major step up in functionality before doing anything.

It is possible that Oracle will provide users with solid support, but users will do well to secure the best long-term contractual obligations they can. It is possible that Oracle ultimately will transform its applications business and be a strong contender to SAP, but this is still years away from being a reality. In the meantime, companies with businesses to run should focus on the most pragmatic solutions. They should hope for the best and prepare for the worst.

Assessment

Companies that need to buy ERP (HR, financial), Supply Chain or CRM software should cross PeopleSoft of their list of vendors. Companies with plans to upgrade need to reconsider their options. Unless companies need to deploy specific functionality for a pressing business reason, we advise them to defer spending on ERP systems and focus on compliance, profitability, and innovation imperatives that directly link to Performance Management (see "ERP Rest in Peace," November 29, 2004). In general, while ERP vendors often offer these capabilities, they may not be the best alternative in terms of features, functions, and long-term flexibility. Choosing an alternative ERP vendor may also require expensive upgrades to existing deployments to make it possible to get all of the features advertised. Moreover, commonality in transactions systems usually has value, but it is rarely the case for decisions support functions such as performance management.

Robert Kugel is CFA, VP & Research Director - Financial Performance Management at Ventana Research (www.ventanaresearch.com), a research and advisory services firm.