July 18, 2003 9:49 AM PDT
PeopleSoft clears acquisition hurdle
Oracle vs. PeopleSoft
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The delay is a bump in the road for what would be the second largest enterprise applications company in the world. PeopleSoft now expects to close the deal in August, rather than next week.
J.D. Edwards investors needed to tender 90 percent or more of the shares in order for PeopleSoft to avoid having to take the merger to a shareholder vote. But since PeopleSoft is now the owner of 88 percent of the shares, and because a simple majority is all that is needed to approve the deal in a shareholder vote, the merger is expected to go through.
Although the deal will be delayed, executives of PeopleSoft and J.D. Edwards hailed the 88 percent figure as a milestone.
"The combination expands not only our customer base, product offerings and markets, but also our talent," PeopleSoft CEO Craig Conway said in a statement. "Our two companies share a high-performance, customer-focused culture, and we look forward to welcoming our colleagues at J.D. Edwards to the PeopleSoft team."
PeopleSoft on Friday iterated that it expects the J.D. Edwards merger to add significantly to its 2004 earnings, excluding amortization and other items. Also, the company anticipates cutting operating expenses by $80 million annually for the combined company within its first full year of operation.
As part of the tender offer that closed at midnight Thursday, J.D. Edwards investors received an exchange rate of $14.74 for every share they turned into PeopleSoft shares. Those who did not tender their shares will receive $7.05 in cash plus 0.43 of a PeopleSoft common share for each J.D. Edwards share. PeopleSoft shares ended the trading day Thursday at $17.90.
Work in progress
While the merger is expected to go through--allowing PeopleSoft to expand its reach in midmarket business applications and the manufacturing sector--the maker of high-end business software will find that its work has just begun.
The combined company will need to execute on several fronts, from integrating business operations and melding corporate cultures to retaining and growing its customer base. In the meantime, it must prove to shareholders that its merger is a better investment than Oracle's hostile $6.3 billion takeover bid for PeopleSoft. For Oracle, the challenge in acquiring PeopleSoft has become tougher, now that its rival's merger with J.D. Edwards is a fait accompli.
PeopleSoft may want to avoid a repeat with its last large acquisition in which it took several years from the time of the 1999 purchase to efficiently integrate Vantive, a specialist in customer relationship management (CRM) products.
The integration with J.D. Edwards is already moving forward, according to PeopleSoft's Conway. Under the merger, J.D. Edwards will operate as a wholly owned subsidiary of PeopleSoft.
After the merger, PeopleSoft "will have product lines that will continue in the marketplace," Conway said during a conference call with analysts Thursday. One will be the AS/400 business; another will cater to the midmarket; and a third will handle large enterprise customers.
Sizing up the cultural fit between the two companies, Bob Dutkowsky, J.D. Edwards' chief executive, said in an interview with CNET News.com earlier this month, "Our cultures complement each other, and our architectures complement each other."
Dutkowsky added that there was little overlap between the two companies, creating a nice fit between the operations. PeopleSoft serves the services industries and large enterprise customers, while J.D. Edwards caters to the manufacturing, distribution and asset-intensive industries.
But at least one analyst sees a greater challenge in bringing the two companies together.
"There's a lot of duplication in functionality, so it will be interesting to see how all the integration issues work out," Ted Kempf, a Gartner analyst, said in an earlier interview.
The Oracle factor
But Oracle's hostile bid may serve as a distraction to those plans.
"PeopleSoft has a very difficult challenge. They have to run their business, they have to think about the integration plan and they have to fend off Oracle's hostile bid. They have an even more difficult challenge than we do," Dutkowsky said. He noted, however, that he remains optimistic Conway will succeed in integrating the companies.
PeopleSoft will need to keep not only the customers of the combined company happy, but also the investors. Unhappy investors will likely be particularly sensitive to Oracle's buyout offer of $19.50 a share.
"PeopleSoft and J.D. Edwards were able to get their transaction completed. But at the end of the day, if the stock isn't near $19.50 a share in six months, there will be some stockholders who aren't going to be real happy about things," said Cameron Steele, an analyst with RBC Capital Markets.
J.D. Edwards investors do stand to make a quick gain on their investment if Oracle succeeds in its hostile takeover attempt of PeopleSoft and if they tender their shares to the database company. If they tender their shares to Oracle by its Aug. 15 deadline, investors would receive $19.50 a share if the hostile merger goes through.
"We're in the process of evaluating that at this time. It all comes down to how strongly we feel PeopleSoft can successfully execute on integrating the companies and whether the synergies they hope to accomplish are realistic," said one large institutional investor for J.D. Edwards.
PeopleSoft's merger with J.D. Edwards also creates several new issues for Oracle's hostile bid. But Oracle still plans to move forward with its efforts.
"We believe time is on our side. Oracle remains committed to acquiring PeopleSoft--even with the addition of J.D. Edwards," said Jim Finn, an Oracle spokesman.
Based on its current offer of $19.50 a share, Oracle would have to pay an additional $1 billion to acquire PeopleSoft after its J.D. Edwards merger, according to Tad Piper, a senior analyst for Piper Jaffray. That figure is based on the additional 52.6 million shares that would result from the PeopleSoft and J.D. Edwards merger.
But Piper noted that Oracle has access to a combined $11.5 billion in cash and credit and could easily pay for a newly merged PeopleSoft.
"They are staying at $19.50. I don't see that changing until the antitrust debate (for Oracle's bid) is resolved," Piper said.
The U.S. Department of Justice and attorneys general from approximately 30 states are reviewing Oracle's buyout offer of PeopleSoft.
Meanwhile, Oracle has remained quiet on any plans it may have for J.D. Edwards if it acquires the combined company. But some analysts and sources familiar with the companies said a spinoff of all or part of J.D. Edwards' business may be on the list.
"It's a lot less attractive to Oracle to buy J.D. Edwards because a large percentage of the J.D. Edwards customer base is on IBM technology. The ability to up-sell in the J.D. Edwards customer base is less so than in the PeopleSoft customer base," Piper said.
If its bid succeeds, Oracle may cut loose J.D. Edwards' AS/400 business from the rest of its operations and try to sell it to SSA Global Technologies and Baan, which are merging, said a source close to J.D. Edwards.
"It would be a clean cut to spin off that business and sell it to SSA and Baan, which are in that business," the source said. "Do I think Oracle would sell it to their competitor? No. But I do think they will use it as a carrot to say they could if they have antitrust issues with the DOJ and attorneys general."