Ellison: 'Radical' industry shift drove bid

SAN FRANCISCO--Increasing competitive pressure from SAP and the entry of Microsoft into the business applications market spurred Oracle to launch its hostile bid for PeopleSoft last year, Oracle CEO Larry Ellison testified Wednesday.

"We wanted to be a survivor and a consolidator, and we felt the only way to survive and prosper was through acquisition," Ellison told a packed federal courthouse. It was the climax of the antitrust trial, in which Oracle seeks to overturn the Justice Department's challenge to its PeopleSoft bid.

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The outspoken CEO was characteristically unflappable under cross-examination by Justice Department attorney Claude Scott. Pressed by Scott to agree that innovation would suffer as a result of PeopleSoft's disappearance, Ellison suggested that his cross-examiner was on another planet. "In the world I live in, we are facing increasing competition and innovation," Ellison said. Theoretically, if there was only one competitor, then the need to innovate goes away, "but that's not the world I live in," he said sharply.

Ellison also refused to be tripped up when confronted with an e-mail that he sent to Oracle Chairman Jeff Henley last year, in which he predicted that smaller software rivals specializing in one niche were doomed to extinction within a year. The e-mail appeared to contradict Oracle's argument throughout the trial that these so-called best-of-breed vendors are among the major competitive threats to the company.

When questioned about it, Ellison said he'd erred in the prediction. "Unfortunately, the majority of the market doesn't share my belief," he said.

Ellison appeared to falter, though, when Judge Vaughn Walker questioned the CEO at the tail end of his testimony. Walker asked him why Oracle preferred to buy PeopleSoft over J.D. Edwards. After all, Walker posited, didn't J.D. Edwards have more success selling to midsize companies--a more lucrative segment of the market than the big companies to which PeopleSoft and Oracle cater?

In his response, Ellison contradicted the testimony of several previous witnesses, claiming that PeopleSoft had a bigger presence in the "midmarket" segment than J.D. Edwards.

Otherwise, Walker didn't interject much during Ellison's testimony, although at one point he prodded Oracle attorney Daniel Wall to ask the CEO more questions during one of Ellison's more long-winded responses.

On the acquisition trail
Ellison said he first considered a merger with PeopleSoft two years ago, after PeopleSoft Chief Executive Craig Conway called him and suggested combining PeopleSoft and Oracle's business applications unit. "I let Craig know we were supportive of putting the companies together, but the devil was in the details," he said.

"With or without PeopleSoft, pricing competition is going to get worse." --Larry Ellison, Oracle CEO

The companies abandoned the talks after several meetings in which the two CEOs disagreed about who would run the combined company, Ellison said. Conway would only agree to a merger if he were left in charge, the Oracle chief testified. Ellison insisted that Oracle run the merged company under his leadership because "we would be the majority owner."

Oracle decided to launch an unsolicited bid for the company nearly a year later--in June 2003--when Conway moved to buy rival J.D. Edwards. "We had no choice but to bypass management and make an offer directly to shareholders," Ellison said.

The effort has been resisted by PeopleSoft and drew the ire of antitrust regulators, who have been arguing before Judge Walker that if Oracle swallows PeopleSoft, only the merged company and German rival SAP will be significant players in the market. Oracle insists that there are plenty of other options for business software packages from smaller companies, outsourcers and the new entrant, Microsoft.

"Microsoft is always very aggressive in entering a marketplace, with a lot of money to spend," Ellison said.

"I don't think Microsoft will be able to monopolize the business applications market like they did the browser market, but they are going to be a strong competitor," Ellison said. "The moment they enter, prices drop like a rock."

Ellison also testified that his company was actively considering three or four other possible takeover targets in addition to PeopleSoft. He did not name the companies but said all were publicly traded. One was an applications provider, one was involved in "business intelligence" and a third was a software infrastructure, or middleware, provider, he said.

Earlier testimony and evidence submitted at trial had identified seven still-listed companies that Oracle had considered acquiring before it launched its bid for PeopleSoft, including BEA Systems and Siebel Systems.

Survival strategy
Ellison cast the hostile bid for PeopleSoft as a survival strategy rather than a predatory effort to squash a competitor. Oracle was particularly worried about the mounting power of SAP, he said, which had forged an alliance with Oracle's key database rival, IBM.

Ellison deposition details merger plan Larry Ellison, CEO, Oracle

"The competitive dynamics were changing radically," Ellison said. "There was going to be tremendous price pressure on our applications business."

In particular, the company was squeezed because it had to both improve its products and cut prices to remain competitive after the technology bubble burst and business applications customers were reluctant to spend as freely, he said.

"The only way to do this is to have a larger installed base" to absorb the costs of improving products. "We chose to do this with acquisition," Ellison said, emphasizing that consolidation in the software industry is inevitable.

The CEO also said that the last thing Oracle wanted to do was "annoy PeopleSoft's customers" by forcing them to buy unwanted software. The plan was to build a successor version of the Oracle and PeopleSoft applications. "We wanted to make it as easy as possible for customers to migrate," he said.

Under lengthy cross-examination by Scott, the Justice Department's attorney, Ellison remained controlled and soft-spoken. The lawyer continually grilled him about Oracle's ability to raise prices if PeopleSoft were to disappear.

"Overall, with or without PeopleSoft, pricing competition is going to get worse," Ellison retorted. "I would agree with you," he said in a flash of humor, "that if PeopleSoft is gone, we will not have to compete with them."

Scott also questioned whether Oracle benefited from the PeopleSoft bid by disrupting a competitor's business. "Don't you gain even if you don't take over PeopleSoft?" he asked.

"From my point of view, there are no benefits if we don't get PeopleSoft," Ellison replied. "We will have wasted a tremendous amount of money and time. It would be a very bad mistake."

The four-week trial was slated to wrap up Thursday with additional testimony from Justice Department witnesses.

Reuters contributed to this story.