February 11, 2004 3:14 PM PST

Justice Department staff opposes Oracle bid

Antitrust division lawyers at the U.S. Justice Department are recommending that the department file suit to block Oracle's acquisition of PeopleSoft, indicating that Oracle may face a serious setback in its embattled bid for its rival.

The Justice Department informed PeopleSoft of the recommendation late Tuesday and said that the agency will make a final ruling no later than March 2, PeopleSoft said. Staff recommendations on antitrust cases usually provide an early indication about which direction the department is likely to lean in its final decision.

Oracle spokesman Jim Finn refused to confirm whether the company had any knowledge of a staff decision. "While no decision has yet been made, Oracle believes this merger will eventually be approved," Finn said in a statement.

News.context

What's new:
Lawyers at the U.S. Justice Department are recommending that the agency file suit to block Oracle's proposed acquisition of PeopleSoft on grounds that the deal will be anticompetitive.

Bottom line:
The decision represents a serious setback for Oracle in its bid for rival PeopleSoft.

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Oracle Chief Executive Larry Ellison said months ago that an unfavorable decision from the Justice Department would put an end to the bid for his Pleasanton, Calif., rival. But more recently, Ellison told USA Today that he would be willing to challenge the Justice Department if it ruled against Oracle.

Oracle's $9.4 billion buyout offer hinges on the Justice Department's decision. The department began an extended review of the deal in June after PeopleSoft and several states said the deal was anticompetitive. PeopleSoft and Oracle are the second and third largest suppliers of application software for businesses, respectively. The largest is Germany-based SAP.

PeopleSoft argues that an Oracle-PeopleSoft combination would leave too few competitors in the market for broad suites of software designed to automate accounting, human resources and manufacturing for the world's largest corporations. It claims prices would rise as a result. Oracle counters that the business applications market has too many rivals, including the formidable competitor Microsoft, which entered the market a couple of years ago.

Justice Department officials said the antitrust investigation into Oracle's bid for PeopleSoft is ongoing, but declined to comment further.

Industry watchers seemed unsurprised by the recommendation, given regulators' scrutiny of the proposed deal. Jeff Comport, an analyst with Stamford, Conn.-based Gartner, said Oracle now must decide whether to move forward with its takeover plans.

"This moves the ball back to Oracle because if the DOJ does file suit, it will become much harder and more costly for them to close this deal," Comport said. "It seems far more likely now that PeopleSoft will remain independent."

Comport said Wednesday he had spoken with Oracle representatives and indicated that they remain optimistic that the Justice Department might decide not to file an antitrust suit. But IT buyers, he said, will likely view the news as an end to any possibility of the deal going through. In addition, he sees many obstacles beyond regulatory action, including shareholder approval, as possibly fatal to the offer.

"The presence of the offer did affect these two companies and cause buyers to delay deals or go to competitors such as SAP," Comport said. "I think (buyers) will now view the deal as less of a factor and potentially reassess what kind of investments they may be willing to make."

Some experts remain unconvinced that the proposed merger merits attention from antitrust regulators. Jim Shepherd, an analyst with Boston-based AMR Research, said he never felt the deal threatened competition in the enterprise software market.

"I didn't see the deal as good or bad for the market, one way or the other," Shepherd said. "There can only be a few vendors that serve the high-end of the business; there are a limited number of customers, and in most sectors, you see two or three vendors at the top. And I never believed the arguments that a merger would drive prices up, as there's no evidence of something like that ever happening in any technology market, and in fact prices would likely go down."

Shepherd said that there would be little Oracle could do to salvage its bid for PeopleSoft if the Justice Department decides to launch antitrust litigation. The analyst felt Oracle's best chance for success lies in its bid to replace a number of PeopleSoft board members later this month, but he is skeptical that Oracle will succeed in that effort.

"You could potentially put directors on board with an agenda to sell the company to Oracle, but after they're elected, you find they can't do the deal done because there's legal issues," said Tom Ball, a senior managing director with Morrow & Co., a New York-based proxy solicitor.

PeopleSoft investors were apparently expecting the Justice Department staff to recommend against the deal. The company's stock fell only 69 cents, or 3.18 percent, to $21 a share in afternoon trading.

"Investors had already discounted the (Justice Department rejection) into the share price," Ball said.

The Justice Department move is the latest twist in an eight-month "soap opera" that has been handled poorly by both sides, said one Wall Street analyst.

"It's not a coincidence that Oracle made its bid right after J.D. Edwards and PeopleSoft announced their deal. J.D. Edwards and PeopleSoft went from being fourth and third to second place. The effect of that is it became something of an ego issue--and neither Ellison, nor Conway, is short on egos," he said. "It's all been a function of two fierce rivals more concerned with their own well-being than their shareholders."

Toward a final decision
The announcement comes after months of speculation over whether the Justice Department would allow Oracle's takeover bid to proceed, or challenge it.

But the final outcome will not be known for possibly several weeks, as the case winds its way through the upper ranks of the Department of Justice's antitrust unit and Oracle makes its pitch in favor of the deal each step along the way, said attorneys who specialize in antitrust cases.

The final decision rests with Hewitt Pate, the Justice Department assistant attorney general who oversees the antitrust unit. Historically, the assistant attorney general has followed the recommendations of the staff.

Should Pate favor the recommendations, the agency will file an injunction to block the deal in federal court. Oracle would then have to fight the Justice Department's decision in federal court.

Oracle attorneys expressed optimism, pointing out that the staff recommendation was not the final department decision.

"The decision on Oracle's merger will be made by the assistant attorney general with the assistance and advice of his staff and deputies. It will take into account not only the recommendation of the investigating staff, which we understand was forwarded to the assistant attorney general today, but also facts and arguments presented to senior division decision makers by the merging parties," James Rill, an attorney with Howrey, Simon, Arnold & White and Oracle's antitrust attorney, said in a statement.

Rill, who once served as an assistant attorney general for three years, said he has seen several cases where the assistant attorney general's decision differed from its staff recommendation when he worked at the agency.

The Justice Department has also been working with the attorneys general of 38 states, as well as the Canadian Competition Bureau and European Commission, in sharing information and updates, said a source familiar with the investigations.

The European Commission, the antitrust regulatory body of the European Union, formally began its review of the deal in mid-October, but announced last month that it had put its review on hold pending more information from Oracle.

Oracle raised the stakes of the deal last week by raising its tender offer to $26 a share from $19.50 a share, the second time it sweetened the deal since its initial bid last June.

The Redwood Shores, Calif., company has also launched a proxy battle for control of PeopleSoft's board. Half of PeopleSoft's directors are up for re-election at a March 25 shareholder meeting, and Oracle seeks to replace them with its own nominees.

CNET News.com's Matt Hines contributed to this report.

 

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