February 26, 2004 6:18 PM PST

Oracle's cloudy crystal ball

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Special coverage: Oracle vs. PeopleSoft

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Oracle indicated late Thursday that,


Special coverage
Oracle vs. PeopleSoft

as expected, it would "vigorously challenge" the U.S. Department of Justice's lawsuit meant to block the merger. "We believe that the government's case is without basis in fact or in law, and we look forward to proving this in court," said Oracle spokesman Jim Finn.

When Oracle CEO Ellison first launched the hostile bid last June, many observers speculated it was only to push a rival off balance and throw a monkey wrench into PeopleSoft's own merger deal, with J.D. Edwards.

Larry Ellison, Oracle CEO But since then Oracle has stuck doggedly with the chase, twice upping its bid and nominating its own slate of candidates for PeopleSoft's board elections, set for next month.

With so many forces mounting opposition to the bid, cooler heads might suggest it's time for Ellison to back off and devote Oracle's resources to other acquisition candidates. "My sense is that at some point, if you fail to overturn the (PeopleSoft) board, and have the clearly negative view from the Department of Justice, it's difficult to make a justification for why you keep at this," said Jim Shepherd, technology analyst at AMR Research.

But Ellison has never been one to follow conventional wisdom.

Now that he and Oracle's board have decided to oppose the Justice Department's lawsuit, they have several tough fights ahead. Although Oracle is dropping its proxy battle for control of PeopleSoft's board--an election that it could never win this year, in view of the Justice Department action--it may have to mount a repeat proxy fight next year. At the same time, the company has to win over the European Commission, which is set to make its antitrust ruling May 11 and may be swayed by the findings of U.S. antitrust regulators.

Court battle a quick one
Legal experts say the court battle, at least, would likely be short lived.

"Merger challenges are generally usually resolved within a matter of months," said Howard Morse, a former senior Federal Trade Commission attorney with the agency's antitrust unit and now a partner with the law firm Drinker, Biddle & Reath. "We're not talking about a case that will last another year."

With the Justice Department complaint now filed in U.S. District Court in San Francisco, the next step is for both parties to begin the discovery process, in which they exchange all evidence gathered to date.

Craig Conway, PeopleSoft CEO The Justice Department's evidence, which would include customer complaints about the deal, would generally be viewed by only Oracle's attorneys, rather than company executives, Morse said. (Oracle executives would be able to review the evidence, however, should the case proceed to trial.)

A judge would then schedule a hearing to consider issuing a preliminary injunction to block the deal. That issue would ultimately be decided by a judge, rather than a jury, Morse said.

"Typically these are short hearings," Morse said. "Some judges want to hear live witnesses, some judges only want to hear experts testify, and some want all testimony submitted on paper and then argued before the judge."

Morse declined to speculate on the potential outcome of the case.

Proxy battle postponed
When the Justice Department announced its decision Thursday, the markets were still open. But PeopleSoft's stock declined only slightly, ending the day down 35 cents, or about 1.6 percent, to close at $21.78. That indicates investors had already factored the lack of a deal into the share price.

The Justice Department decision has defused the proxy battle between Oracle and PeopleSoft for control of the latter's board this year. Even if Oracle succeeds in overturning the Justice Department case, it would still have to gain the approval of PeopleSoft's board. If the board continues to oppose the deal, Oracle would have to win a Delaware Chancery Court ruling to overturn PeopleSoft's "poison pill" and convince the majority of PeopleSoft shareholders to tender their shares. If that fails, Oracle would have to wait another year until the next shareholder meeting to launch a proxy battle, elect a favorable PeopleSoft board and throw out the poison pill that way.

"The poison pill is a more difficult barrier than the Justice Department ruling because it makes it almost impossible to do the acquisition," Shepherd said. Oracle's offer is "conditional on the poison pill disappearing."

Shepherd said Oracle may want to draw out the process for another year.

"The longer they stay in this, the longer it continues to have a potentially negative impact on PeopleSoft's business, which is not a bad thing from Oracle's perspective," Shepherd said. "It's not a drain on Oracle; they can easily afford to keep this going."

But other analysts disagreed. "I don't think they (Oracle) do a lot for their image by continuing to fight this battle," Forrester analyst Paul Hamerman said. "It appears to be obsessive at this point. They should really walk away from this thing and focus on building their own application business, which is a pretty substantial business for them."

Opportunity costs
If Oracle gets bogged down with its quest for PeopleSoft, it could lose sight of other acquisition opportunities. Oracle Co-president Charles Phillips has said repeatedly that PeopleSoft is not the only target of Oracle's acquisition strategy. But it's hard to see Oracle simultaneously waging the PeopleSoft battle on several fronts and pursuing another takeover candidate.

So a prolonged fight would have a high opportunity cost for Oracle if it distracts the company from making other acquisitions, analysts said. "There are a lot of good companies to be bought, both in the U.S. and internationally," said Joshua Greenbaum, analyst at Enterprise Applications Consulting.

Possible alternatives to PeopleSoft include QAD, Lawson and SSA, Greenbaum said. Another candidate is NetLedger, a rival to Salesforce.com in the subscription software market, Hamerman said.

Although none of these potential targets is anywhere near the size or stature of PeopleSoft, that's a good thing, the analysts said. "I think (Oracle) would be inclined to look for smaller acquisitions that wouldn't have as much antitrust scrutiny," Hamerman said.

One company that analysts have long speculated may be next on Oracle's list is Siebel Systems. But an Oracle bid for Siebel could turn into a replay of the PeopleSoft offer, Greenbaum said. Like PeopleSoft, Siebel has been a ferocious competitor to Oracle in the past. And Ellison has exchanged only slightly fewer barbs with Siebel Chief Executive Tom Siebel than with PeopleSoft Chief Executive Craig Conway, both of whom worked under Ellison at Oracle in their rise through the software industry ranks.

A Siebel bid "would be hostile with a capital 'H' because of the history between the companies," Greenbaum said.

Another oft-mentioned target is BEA Systems, which competes in the application server software market, rather than the applications software market. A BEA buy could bolster Oracle in the information technology infrastructure market, where it already competes with its database software.

However it plays out, the Justice Department's ruling does nothing to stop the wave of acquisitions activity sweeping through the software industry, Greenbaum said.

"There is still SAP out there," he added, referring to the market leader in business application software. "I just talked to a company that told me their biggest problem is competing with SAP, so there are still a lot issues that will force consolidation."

 

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