July 20, 2004 4:34 PM PDT

Judge grills Oracle, DOJ at trial's close

SAN FRANCISCO--The judge presiding over the Oracle antitrust trial aggressively questioned the software maker and the U.S. Justice Department on Tuesday as both sides made final arguments regarding Oracle's attempt at a hostile takeover of rival PeopleSoft.


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The Justice Department went first on Tuesday afternoon, and U.S. District Court Judge Vaughn Walker quickly hit attorney Claude Scott with a barrage of questions about the government's market analysis. Walker asked why he should view the market in question as being limited to the United States, as the agency contends, rather than extending worldwide.

"How can this be anything but a global market?" Walker asked, noting that the software code that PeopleSoft and Oracle sell in the United States is the same code they sell in Europe.

He also called into question the Justice Department's market analysis, which defines the relevant arena as "high-function" human resource management and financial management software. "Is this a definition that has ever been used outside this litigation?" Walker asked Scott.

In defense, Scott argued that regardless of geography, the Oracle-PeopleSoft merger would create an illegal duopoly. "Whether it?s a U.S. market or a worldwide market, either way, the next best alternative" disappears, Scott said.

The Justice Department filed suit against Oracle in February, charging that its hostile buyout bid for PeopleSoft would give the merged company too much market power. Oracle argues that Germany's SAP and a flotilla of other competitors would keep it in check.

Walker spent just over an hour questioning Scott and then called Oracle's lead attorney, Dan Wall, to state his case.

"This is the first merger case that the goverment has tried to challenge in which the mergered firm would not have dominant market share," Wall noted in his summation.

Walker dealt to Wall the same intense questioning that Scott had received. Walker appeared sympathetic to business software customers such as DaimlerChrysler and Nextel Communications, which had decried the prospect of a PeopleSoft buyout in testimony last month.

"I agree that the government (market) definition is awkward and unwieldy," Walker said. "But we heard from customer witness after customer witness; these people all say that what SAP, PeopleSoft and Oracle sell is different from the other vendors."

Wall said he disagreed with those customers and insisted that government economic analysis of the market is flawed. Oracle has argued that corporate software buyers have a broader selection of choices, including Lawson Software, American Management Systems, business systems outsourcing firms, and, increasingly, Microsoft.

"Do the products (the government) calls midmarket products take business away from us? They don't get as much perhaps (as SAP and PeopleSoft) but they get a lot," Wall said. Those little victories are enough to count the smaller firms as contenders, he said. "You don't have a the clear break in the chain of substitutes."

PeopleSoft weighs in
After the trial closed, PeopleSoft CEO Craig Conway gave reporters his spin on the day.

"I think the case has been, from the beginning, about harm to the customers and to the industry," said Conway, who was in the courtroom all afternoon--his sole appearance at the trial. PeopleSoft has suffered since Oracle announced its takeover plan. "My greatest hope is for an expeditious decision."

The high-profile trial started in June, with a month of testimony from numerous economists, software executives and business software customers. The verdict in the nonjury trial rests solely with Walker, who is expected to rule by September.

Oracle and PeopleSoft each make computer programs designed to automate common business tasks, such as processing orders, tracking inventory and updating personnel records. SAP is the largest seller of such software. PeopleSoft and Oracle hold the No. 2 and No. 3 spots, respectively.

Oracle launched its surprise bid for PeopleSoft more than 13 months ago and has faced an uphill battle ever since. PeopleSoft's board has rejected multiple offers and erected numerous obstacles to its unwanted suitor, including an antitakeover provision that would flood the market with new shares if another company acquired a large enough stake in the company--making a takeover prohibitively expensive.

Few thought Oracle would prevail in the antitrust case because such victories are rare. Yet after the testimony phase of the trial ended on July 1, PeopleSoft's shares have climbed on speculation that the trial had gone Oracle's way. The rise in share price comes despite PeopleSoft's recent warning that second-quarter earnings would fall below target.

No matter the outcome, the legal drama will probably continue. Analysts say the losing side is likely to appeal the decision. Speaking outside the courtroom, R. Hewitt Pate, assistant attorney general for antitrust, said he would not rule out an appeal if the judge ruled in favor of Oracle.

The European Commission, Europe's antitrust agency, is also reviewing the deal. PeopleSoft and Oracle are each suing each other as well, with PeopleSoft charging that Oracle launched the hostile bid merely to damage a competitor. Oracle's suit seeks to overturn PeopleSoft's "poison pill" antitakeover measure.

 

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