July 1, 2004 11:00 PM PDT
No clear-cut winner in Oracle antitrust trial
Oracle and the Justice Department just finished four weeks of fighting over whether the company's desire to take over PeopleSoft would leave an uncompetitive market.
We won't have a verdict until August or September. In the meantime, observers are split over who was most convincing before the judge.
Oracle, PeopleSoft and Germany's SAP dominate the market of enterprise software for major corporations. They provide applications for payroll, human resources and other functions to major manufacturers, telecommunications firms and other big operations. The Justice Department is trying to stop Oracle from pursuing a $7.7 billion hostile buyout of PeopleSoft, arguing that a market overshadowed by SAP and a bigger Oracle wouldn't have sufficient competition to drive prices down and innovation up.
The nonjury trial in U.S. District Court in San Francisco wound down Thursday after Oracle and the U.S. Justice Department rested. Each side is expected to make closing statements on July 20, then await Judge Vaughn Walker's decision on whether Oracle may pursue the acquisition.
Walker is expected to issue his ruling in August or September. In the meantime, observers are split on exactly who came out ahead.
A handful of technology analysts said Oracle's vigorous opening arguments set the tone of the trial and that the government never fully recovered from a stumbling start on the first day. "I think (the Department of Justice) is on really shaky ground and has been from beginning," AMR Research analyst Jim Shepherd said.
What bothers many technology analysts about the government's case is that it's concerned with a relatively small slice of the overall enterprise software market. The market for so-called high-function human resources and financial programs at the heart of the case generates about $500 million or so of the more than $20 billion that companies spend each year on business applications, according to the Justice Department. Oracle says it's even smaller than that.
"I think the risk that (the government) runs here is that the definition is so narrow that the court may not see the market as big enough to regulate," Forrester analyst Paul Hamerman said.
A former Justice Department antitrust official found the government's case more compelling. Stan Gorinson, now a partner with Kilpatrick Stockton, noted that the government didn't have to bear as great a burden of proof as in a criminal trial. As the plaintiff in a civil case, Justice Department attorneys must only persuade the judge that arguments tilt in their favor by 50.1 percent.
Another attorney, hired by investor clients to monitor the trial from the courtroom, said he believes the Justice Department will ultimately prevail. The attorney, who asked not to be named, said the government met its burden of proof in "introducing good evidence."
Witnesses for the plaintiff
The Justice Department's customer witnesses were particularly strong, such as Laurette Bradley, executive vice president of information technology at Verizon Communications, and Perry Keating, senior vice president of global enterprise solutions for systems integrator BearingPoint, the investor attorney said.
Bradley, under cross-examination by Oracle, was steadfast in her belief that Verizon, a PeopleSoft customer, would "lose either way" if forced to chose between a merged Oracle-PeopleSoft or industry leader SAP.
Keating testified that the system integrator's customers chose SAP, Oracle or PeopleSoft for their projects, with Lawson Software a distant fourth. Keating gave an overview of how system integrators and the industry work and provided a detailed, coherent explanation for the judge, the investor attorney said.
The Justice Department was also able to establish its case that Oracle's pricing is affected by whether PeopleSoft is competing for the same customer, he said. Internal discount forms showed Oracle was aware when it was competing against PeopleSoft in the bidding process and would seek executive approval to offer a larger discount, according to court documents.
But the Justice Department also called some witnesses to the stand that did little to advance its case. Marco Iansiti, a Harvard Business School business professor, was one, the investor attorney said. "A lot of his testimony was shaky. When he talked about his (merger) analysis, Oracle got him to admit he had not factored in outsourcing or the 'do nothing' choice as options."
Oracle takes its stand
After the Justice Department's two weeks of presenting testimony, Oracle took the offensive with a pared-back list of witnesses--it even reversed its plan to call PeopleSoft CEO Craig Conway to testify.
In an unusual move that some say backfired for Oracle, the company paid a "fact witness" to testify in the case. But hiring Ken Harris, a former IT executive at the Gap, Nike and Pepsi, may have hurt Oracle's cause, attorneys say.
"Hiring a fact witness is new to me. It sounds to me like he wouldn't have much credibility," Gorinson said. "Hiring an expert witness is common because they're experts in their field, but fact witnesses are to testify about the facts in the case."
Judge Walker seemed to have taken note, referring to Harris at one point during his testimony as "your paid witness," rather than by his name.
Near the end of the trial, Oracle CEO Larry Ellison said that Oracle's bid for PeopleSoft was not about market dominance or destroying a rival, but keeping his company competitive in a difficult market. The often combative Ellison was more contained than his flamboyant reputation might have suggested, but he was unflinching--and good-humored--under cross-examination. But not every observer was enchanted.
"Why did they bring him to testify?" the investors' attorney wondered. He said Ellison's testimony mostly reiterated what Oracle had already presented to Judge Walker. The investors' attorney said Ellison's argument, that expanding Oracle by swallowing a major rival would foster competition in the market, goes against common antitrust theory.
"Ellison's testimony had nothing to do with legal premise," he said. But it did garner a lot of media coverage--reports likely to be seen by Oracle competitors, investors in both Oracle and PeopleSoft and other industry players. "Maybe it was more about doing public relations for the case."
Testimony from numerous economists seemed to be a wash. Not surprisingly, the economists called by the government were at odds with those that testified for Oracle.
One of the more compelling government witnesses was University of Virginia economics professor Kenneth Elzinga. Gleaning information from Oracle's internal discount approval forms, he offered an especially lucid analysis of the business applications market in which Oracle, SAP and PeopleSoft compete. However, in cross-examination, Oracle's legal team managed to cast some doubt on Elzinga's methods, pointing out extraneous data he included in his statistics.
With the burden of proof resting on the government's shoulders, some think the confusion could play into Oracle's hands. "In the absence of anything clear cut, the judge will have to rule in Oracle's favor," predicted Enterprise Applications Consulting analyst Joshua Greenbaum.
Everybody had a stake
What makes the trial such a toss-up is that so much of the testimony came from biased witnesses. Oracle leaned heavily on testimony from rivals SAP and Lawson Software. Yet both companies stand to benefit from the removal of a chief competitor like PeopleSoft from the market.
IBM and Microsoft testified on behalf of the government, but confidential documents from both companies revealed that they fear losing ground to Oracle in other software battles if the PeopleSoft deal happens.
The customer testimony was also less than straightforward. Testimony from distraught PeopleSoft customers, such as Verizon Communications, was central to the government's case. However, much of their alarm appeared to stem from pocketbook concerns--the prospect of having to install new business systems after investing millions of dollars in their PeopleSoft projects--than from genuine antitrust worries.
"Their issue is that they spent a lot of money on PeopleSoft technology, and they're worried that investment is going to be stranded, that it's going to be damaged and that they are going to incur migration costs," said Oracle lead attorney Daniel Wall. "I don't regard that as an antitrust issue."
The Microsoft Factor
Some of the trial's high points may not ultimately have bearing on the antitrust question, such as details of previous merger talks between PeopleSoft and Oracle, or the presence of Larry Ellison, Oracle's high-profile CEO. The most relevant marquee name, Microsoft, didn't appear to deliver an obvious benefit to either side. The stunning news, on the opening day, that Microsoft had approached SAP about a merger last year at first appeared to support Oracle's case. While the discussions were abandoned, Oracle pointed to them as proof that Microsoft, a marginal player in the back-office applications market today, has plans to compete more aggressively.
Yet Microsoft executive Doug Burgum later testified that Microsoft gave up its intentions of competing at SAP's level when the merger talks fell through, and internal Microsoft documents corroborated his story. Justice Department lawyers argued that the aborted SAP deal demonstrated the market's high barriers to entry, one of the pillars of its case.