Oracle Clears Justice Hurdle, But It's Not Over

A huge obstacle has been cleared in Oracle's quest to buy PeopleSoft Inc., but the $7.7 billion acquisition attempt is nowhere near a done deal.

U.S. District Judge Vaughn Walker handed down his decision Thursday in the monthlong trial, siding with Oracle's position that its bid to buy its competitor does not violate antitrust laws.

Instead, Walker said that the plaintiffs had not shown by a preponderance of evidence that the merger of Oracle and PeopleSoft is likely substantially to lessen competition in a relevant product and geographic market. "The court directs the entry of judgment against plaintiffs and in favor of defendant Oracle Corp.," the judge wrote.

"We are disappointed in the court's decision," R. Hewitt Pate, assistant attorney general in charge of the Justice Department's antitrust division, said in a statement made after the court issued its decision. "We believe the facts and evidence in this case support our position that Oracle's proposed acquisition of PeopleSoft would result in a substantial lessening of competition in the markets for high-function human-resources-management and financial-management-systems software. The department is considering its options."

PeopleSoft has been aggressively fighting off Oracle's advances since Larry Ellison and company first put up $5.1 billion in an attempt to buy the rival software vendor in June 2003. The battle has cost PeopleSoft as much as $70 million as of July this year, and it's taken a toll on the vendor's business.

In PeopleSoft's earnings statement for its second quarter, ended June 30, president and CEO Craig Conway said of the trial and ongoing media coverage, "Clearly it was the elephant in the room for our customers." The company reported a 16% jump in license revenue to $130 million for its second quarter, ended June 30, compared with $112 million for the same period a year ago. Total revenue was $647 million, up from $497 million a year ago. But net income was down 70% to $11 million, compared with $37 million in the second quarter of 2003--and company execs blamed that slip in part on costs associated with the Oracle battle. The struggle has been going on at the same time PeopleSoft has been absorbing its $1.7 billion purchase of J.D. Edwards & Co., an acquisition finalized in August 2003 that created the world's second-largest enterprise applications vendor behind SAP.

Oracle's victory in the U.S. courts is just one hurdle, however. There might also be an appeal, or the European Union may raise its own antitrust challenge. Another potential obstacle is that PeopleSoft has built into its bylaws a poison pill that could be used to make its stock less attractive to Oracle. And Oracle has to win the hearts and minds of PeopleSoft shareholders. As AMR Research analyst Jim Shepherd says, "The uncertainty continues."

According to a statement from Oracle chairman Jeff Henley, "This decision puts the onus squarely on the board of PeopleSoft to meet with us and to redeem their poison pill so that the shareholders can accept our offer."

PeopleSoft issued a statement Thursday that its board of directors will review the implications of the ruling, noting that its board had already "carefully considered and unanimously rejected each of Oracle's offers, including its current offer of $21 per share. On May 25, 2004, the board concluded that the current offer was inadequate and did not reflect PeopleSoft's real value. The board received the opinions of Citigroup Global Markets Inc. and Goldman, Sachs & Co. that the $21-per-share offer was inadequate from a financial point of view."

The uncertainty may hurt PeopleSoft more than anyone else, says Mike Dominy, senior analyst with the Yankee Group. Few companies that aren't already PeopleSoft customers are likely to look at PeopleSoft as an option, Dominy says. "They'll look at SAP and Oracle, because Oracle isn't going to go away in any scenario." That may not be universally true, however--PeopleSoft's Latin American sales team just recently signed the largest deal in the history of the company, valued at more than $50 million, with Mexico's Tax Administration Service, the equivalent of the Internal Revenue Service in the United States.

Among PeopleSoft customers, it appears the prevailing mind-set has been against an Oracle buyout. "From a PeopleSoft customer point of view, we all wish the Oracle thing would go away," says Andrew Albarelle, principal executive officer of Remy Corp., an IT staffing company and PeopleSoft customer since 2001. "I would be concerned if we became a Larry Ellison customer. That would not be a good thing."

Albarelle says if Oracle has its way, Remy would probably cut all ties with the vendor, including dropping maintenance agreements. It would stay on the current version of PeopleSoft, "and basically home-grow it."

Much of the anger toward Oracle stems from the company's comments, shortly after it announced its bid, that gave the impression Oracle would kill off most PeopleSoft applications. Since then, Oracle has said it will continue to support both PeopleSoft and J.D. Edwards software and customers for at least 10 years.

"That'd be the smart move," says Stephen Pickett, CIO of Penske Corp. and a board member of the Society for Information Management, a 3,000-member-strong networking group of CIOs, senior IT execs, academics, consultants, and other IT leaders. "I don't think they'd take any actions that irritate the customer base," he says.

Ace Hardware Corp., which uses J.D. Edwards' general-ledger and accounts-payable apps, isn't rushing a decision on what action it will take if Oracle ultimately prevails. If that happens, it wants some straight, specific answers from Oracle to its questions. "I'd ask, what would be their support strategy for our software modules? What would be their pricing strategies?" says Mike Altendorf, VP of IT at Ace Hardware. "What would be their future plans for the products? We would need to learn more before establishing a game plan."