December 14, 2004 7:35 AM PST

PeopleSoft customers, employees weigh deal

Oracle may be celebrating its long-awaited union with PeopleSoft, but a day after the landmark deal not everyone is happy.

Among those likely to be looking at the $10.3 billion merger with some trepidation are hundreds of major corporations and thousands of smaller companies that rely on PeopleSoft's programs to run their businesses.

In addition, PeopleSoft's 12,000 employees are wondering how the deal will affect their jobs. And Oracle competitors are weighing the merger's potential effect on their business.

Some of the most anxious companies are those using software from J.D. Edwards, which PeopleSoft acquired last year.

Oracle has repeatedly promised to bend over backward to keep PeopleSoft's 12,200 customers happy, but some are already disgruntled.

"The customer has taken the back seat," said Ray Justus, manager of systems development at Kitchell, a construction company in Phoenix, Ariz. "This is all a money deal; it's about Oracle wanting to get bigger to compete with the bigger guys."

Justus is understandably unsettled. He just got used to working with PeopleSoft. Now Kitchell and thousands of other former J.D. Edwards customers must adjust to yet another set of owners for the company. The fact that Oracle initially preferred to acquire PeopleSoft without J.D. Edwards, is further cause for concern, Justus said.

"We're just wondering what's going to happen," he said.

A number of big PeopleSoft customers, including DaimlerChrysler, Verizon Communications and Cox Communications, expressed alarm over the PeopleSoft takeover as witnesses in a government antitrust suit over the deal.

Executives in charge of information technology at each of those companies testified at the June trial that the merger was likely to raise software prices and cause costly disruptions. None of them returned calls about Monday's deal.

However, PeopleSoft customers should take into consideration that Oracle executives, including CEO Larry Ellison most recently, have vowed to do right by them, technology analysts said. It would be in the company's interest to honor such promises because of the lucrative software maintenance fees those customers pay.

One Oracle customer offered a sunnier view of the deal. Charles Peters, senior executive vice president of Emerson Electric, said he looks forward to seeing new products from Oracle as a result of the merger.

"I think it's a positive development," Peters said. "Oracle needs the scale to compete on a global level and keep up the development necessary to provide complete information technology solutions to companies like our own."

Keeping existing customers happy--whether they use software from Oracle, PeopleSoft or J.D. Edwards--is job No. 1 for Ellison, said analysts. "The big challenge for Oracle is to keep the PeopleSoft customer base," said Joshua Greenbaum, analyst at Enterprise Applications Consulting. "If those customers start evacuating to higher ground, Oracle's in trouble."

One of the major reasons for Oracle's interest in the merger is the recurring revenue from maintenance fees and upgrades to existing software paid by PeopleSoft customers.

A growing percentage of Oracle's revenue comes from such fees, which are highly lucrative, often producing profit margins of 80 percent to 90 percent. As the growth in new software license sales slows, Oracle, along with other software makers, will increasingly rely on maintenance fees to fuel quarterly profits.

Rivals weigh in
Oracle fears that some customers may flee to German rival SAP, the largest supplier of business planning software in the world. The company has been a primary beneficiary of the 18-month battle between its two closest competitors, selling itself as the safe and reliable alternative.

SAP still expects that message to hit home with corporate customers, even now that the Oracle deal has turned friendly, SAP spokesman Bill Wohl said. That's because Oracle and PeopleSoft have a difficult task ahead of them as they attempt to merge the companies and their products, he said.

"All of this bodes very well for SAP," Wohl said. "For us, it's business as usual."

In the long run, however, Oracle may prove a much tougher competitor to SAP. In fact, Ellison has repeatedly cast his bid for PeopleSoft as a direct shot at SAP.

"I think it's both the worst and best thing to happen to SAP," Greenbaum said. "It's the worst in that they now have a big global competitor with a lot of resources."

"The good news is that competition sharpens one's senses and appetite," he continued. "I think SAP responds well to competitive threats. It will keep them on their toes, and that's good for the industry."

IBM has more to lose from the deal, analysts said. For one thing, PeopleSoft generates a lot of business for IBM's computer services unit, which has specialized in installing and customizing PeopleSoft's complex programs.

The company also sells database software and other tools that complement PeopleSoft's programs and compete with Oracle. In September, PeopleSoft and IBM announced a five-year plan to more tightly link their products. That deal may also be in jeopardy since Oracle is partial to its own products.

"There is no getting around the fact that IBM isn't going to be very happy" about the merger, said AMR Research analyst Jim Shepherd. "They can rebuild their Oracle services practice, but it won't make up for the PeopleSoft practice, which is certainly going to diminish."

An IBM representative downplayed the news, saying that the company expects to continue its work with PeopleSoft customers and has many other important alliances.

"We have tens of thousands of partnerships, many of them with the most well-known software applications firms, including SAP and Siebel Systems," IBM spokeswoman Lori Bosio said.

Yet during the its antitrust trial, Oracle submitted evidence showing that IBM feared its purchase of PeopleSoft. In a document that IBM created about a week after Oracle launched its hostile bid, Big Blue lamented the prospect of the software market consolidating into the hands of database rivals Oracle and Microsoft. The documents also showed that IBM considered acquiring "blocking stakes" in key software companies and launching lobbying efforts against certain mergers with regulators.

Microsoft also viewed the PeopleSoft-Oracle merger as a threat and approached SAP about a merger last year in response to the bid--another juicy tidbit made public in the June trial.

Microsoft, which doesn't rely on PeopleSoft as much as IBM does for its database business, has less reason to worry about the Oracle deal, analysts said. However, Microsoft may need to reassess its own fledgling effort to establish a corporate applications business in light of the deal.

"I think the odds are 50-50 that they are in this business in five years," Greenbaum said of Microsoft. "If they stay, odds are that they make another acquisition."

A Microsoft representative declined to comment.

Layoffs loom
While customers and competitors ponder the deal, PeopleSoft's 12,000 employees--many of them based in the company's Pleasanton, Calif., headquarters--have more reason to worry. As many as half of them could lose their jobs. Oracle President Safra Catz testified during the June antitrust trial that her company planned to fire about 6,000 workers, with PeopleSoft taking the brunt of the layoffs. In an interview Monday with CNBC, Ellison said the layoffs will hit both sides.

Several employees interviewed at the firm's Pleasanton campus on Monday, each of whom requested anonymity, expressed concerns about the deal.

"I thought it would take another six to eight months," said one PeopleSoft employee, who previously worked at Oracle and does not expect to be hired back. "I thought Oracle wouldn't raise its bid until a couple days before PeopleSoft's (March) shareholders meeting."

PeopleSoft invited employees on Monday morning to call in to a companywide teleconference, where PeopleSoft CEO David Duffield explained the rationale for the merger and what to expect next.

After the call, employees were seen throughout the day gathering in pairs or small groups to talk about the fallout of the merger, one contract worker said.

"It's been like grade school, where people are busy chatting in the hallways," he said. "As I walk around, it seems like only half the people are working. The rest are talking to co-workers or friends and family on the phone."

Another employee, an engineer who has worked at PeopleSoft for six years, said he's not too concerned about losing his job because Oracle doesn't compete with the product his group develops.

"I'm not worried," he said. "I expect to be picked up."

News.com's Dawn Kawamoto contributed to this report.

 

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