February 26, 2004 5:15 PM PST

U.S. to block Oracle bid for PeopleSoft

U.S. Department of Justice officials on Thursday filed a lawsuit to block Oracle's hostile $9.4 billion takeover bid for PeopleSoft, but Oracle vowed to challenge the move.

The Justice Department on Thursday filed a 17-page civil


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Oracle vs. PeopleSoft

antitrust lawsuit in U.S. District Court in San Francisco to block the proposed acquisition. In reaching its decision, the agency said the combination of Oracle and PeopleSoft would hurt competition in the market for software sold to large businesses. Industry watchers had largely expected the deal to be ultimately blocked, given an earlier recommendation by the Justice Department staff to nix the bid.

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What's new:
The U.S. Justice Department is filing suit to block Oracle's hostile $9.4 billion bid to acquire PeopleSoft.

Bottom line:
The feds say the combined company would hurt competition in the market for software sold to large businesses. Oracle says that whether the bid is blocked or not, it's in the market for acquisitions.

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The attorneys general of Hawaii, Maryland, Massachusetts, Minnesota, New York, North Dakota and Texas are joining the Justice Department's lawsuit. Other states, including California, may also challenge the proposed merger, sources said.

"We believe this transaction is anticompetitive--pure and simple," R. Hewitt Pate, assistant attorney general in charge of the Department's antitrust division, said in a statement. "Under any traditional merger analysis, this deal substantially lessens competition in an important market. Blocking this deal protects competition that benefits major businesses as well as government agencies that depend on competition to get the best value for taxpayers' dollars."

But late Thursday, Oracle announced that its board of directors had met and decided to "vigorously challenge" the Justice Department's lawsuit. While challenging the suit, Oracle said it will withdraw a slate of directors it had proposed for a March 25 meeting of PeopleSoft shareholders. It also extended the tender offer for PeopleSoft shares to June 25 from March 12.

"The department's claim that there are only three vendors that meet the needs of large enterprise does not fit with the reality of the highly competitive, dynamic and rapidly changing market," Oracle said in a statement.

In its lawsuit, the Justice Department argued that the market is controlled by only a handful of players.

"The market is down to three viable suppliers who will help reautomate the back office business processes for global enterprises for years to come."
--Charles Phillips, current co-president of Oracle, made this assessment of the market when he was an analyst in 2002.
To illustrate its point, the government cited a report from Chuck Phillips, now the co-president of Oracle, when he was an industry analyst in 2002. The lawsuit said, "He issued a report that stated, 'The back-office applications market for global companies is dominated by an oligopoly comprised of SAP, PeopleSoft and Oracle. The market is down to three viable suppliers who will help reautomate the back-office business processes for global enterprises for years to come.'"

The lawsuit also said, "The elimination of one of only three vendors of high-function enterprise software will likely result in higher prices." A merger will also harm current customers, because competition between Oracle and PeopleSoft has "led to a high level of innovation and upgrades to each company's products," according to the suit. "Oracle will no longer have the incentive to innovate in order to differentiate itself from PeopleSoft."

Oracle accused the Justice Department of being influenced by PeopleSoft's lobbying efforts.

"The Department of Justice decision follows an aggressive lobbying campaign by PeopleSoft management," said Jim Finn, a spokesman for Redwood Shores, Calif.-based Oracle. "It is inconsistent with the overwhelming evidence of intense competition in the markets we serve, and we believe it is without basis in fact or in law. A combined Oracle/PeopleSoft will significantly benefit all customers and shareholders involved."

PeopleSoft hailed the decision, adding that Oracle should scrap its takeover attempt.

"Now that the antitrust day of reckoning has arrived, and the Justice Department has announced its decision to sue to block the transaction, it is time for Oracle to abandon its efforts to acquire the company," PeopleSoft President and CEO Craig Conway said. "Both companies should now devote all of their energy to competing in the marketplace to provide better products and services for customers. That's the PeopleSoft way of creating greater value for our stockholders."

In reaching its conclusion, the Justice Department interviewed Oracle and PeopleSoft customers, consulting firms, resellers and potential buyers of the software, assistant attorney general Pate said.

He added that a settlement was not discussed.

Moves and countermoves
It's been a nine-month saga for the companies, which started in June, when Oracle launched a surprise hostile bid for Pleasanton, Calif.-based PeopleSoft. Oracle's takeover bid was prompted by a PeopleSoft announcement four days earlier that it planned to buy J.D. Edwards.

In previous statements, Larry Ellison, Oracle's chief executive, said his company felt compelled to act quickly and that it preferred to buy only PeopleSoft--rather than the combined company.

But while Oracle had the advantage of a surprise bid, PeopleSoft responded with two important strategic moves--one designed to keep its deal with J.D. Edwards intact and the other to reduce the defection of its customers.

In order to move ahead with its acquisition plans, PeopleSoft changed the terms of its J.D. Edwards acquisition. That allowed PeopleSoft to close its deal without approval from its shareholders, who might otherwise vote against it in favor of a higher buyout bid from Oracle.

PeopleSoft also offered customers a guarantee that its products would be supported for at least a decade; otherwise, Oracle--or any other buyer--would have to refund customers two to five times their software license fee costs.

PeopleSoft was able to close the J.D. Edwards acquisition in August. And, while acknowledging that some of its customers were delaying purchases or switching vendors as a result of the Oracle takeover bid, the company was able to post fourth-quarter revenue results that beat analysts' expectations as well as increase its earnings forecast for 2004.

Meanwhile, against the backdrop of the hostile tender offer, Ellison and Conway, a former Oracle executive, lobbed barbs at one another, at times with colorful imagery involving bullets and dogs.

Throughout the past nine months, Oracle's takeover bid, as well as the PeopleSoft and J.D. Edwards merger, has served as a reminder that the industry is undergoing consolidation.

Ellison himself noted during the company's annual shareholders meeting that Oracle will be in acquisition mode--with or without PeopleSoft.

"Our strategy has historically been to build products and enter new markets, as the industry matures and we become a larger and larger company. But if you really want to move the revenue dial at Oracle, we're going to have to do a combination of developing new products...(and) go into the market and buy some number of companies," Ellison said.

"If the merger doesn't go through, we will look at other acquisitions," he said. "Even if it does go through, we will probably go look at other acquisitions."

 

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