PeopleSoft to buy J.D. Edwards

The deal calls for each share of J.D. Edwards stock to be exchanged for 0.86 of a PeopleSoft share, valuing J.D. Edwards' stock at around $14.10--a 19 percent premium over Friday's closing price of $11.81.

The merger will create a company with $2.8 billion in annual revenue, 13,000 employees and more than 11,000 customers in 150 countries.

PeopleSoft has focused on human-resources software, especially in the high-end enterprise, while J.D. Edwards has worked more on manufacturing-integration software, particularly in the midsize business market.

Executives at PeopleSoft said Monday there is a "very, very small" amount of customer overlap between the two companies. The new company will continue to face competition from rivals such as SAP and Oracle, at a time when corporate spending on technology is still slow.

PeopleSoft said the deal will help expand its business presence in manufacturing, distribution and asset-intensive industries.

"With PeopleSoft's strength in the large enterprise space and services industries, combined with J.D. Edwards' position as an acknowledged leader in the midmarket and manufacturing, we will be able to serve the entire enterprise software market in a way that no other vendor can," J.D. Edwards CEO Bob Dutkowsky said in a release.

PeopleSoft, like many business software makers, has suffered financially from stingy corporate spending on business software. In April, the company warned that 2003 profits will be lower than a year ago and that it is cutting 200 jobs from its payroll.

In addition to rivals Oracle and SAP, PeopleSoft also faces a growing challenge from other competitors such as Microsoft. This situation has increased PeopleSoft's focus on business application software. Microsoft recently reassigned its top sales executive to drive expansion of its small and midsize business applications unit and hopes to eventually transform its business solutions division into a $10 billion unit.

One analyst surmised that PeopleSoft's acquisition reflected how Microsoft and SAP are gaining greater influence in the midmarket sector, where most IT spending is occurring today.

"The key reason that drove the acquisition is the competitive threat from Microsoft and SAP," said Trip Chowdhry, an analyst with FTN Midwest Research, an independent research firm with no investment banking relationships. "Microsoft and SAP have changed the rule of what midmarket offerings need to be in terms of price, time to customization, and in terms of out-of-the-box experience."

"PeopleSoft had no other way but...to buy J.D. Edwards to claim relevancy in the midmarket," said Chowdhry. "This was the only thing they could do because their own products never catered to that market."

		Special Report Buyer's market The economy has turned tech sales upside down.

But PeopleSoft said the new deal should add to its 2004 earnings, excluding amortization and other items. PeopleSoft Chief Financial Officer Kevin Parker said the company expects to reduce operating expenses for the combined company by $80 million annually within the first full year of combined operations. The deal is expected to close in the third quarter.

J.D. Edwards will be operated as a wholly owned subsidiary, but the organizations will be integrated, and there may be some integration of sales forces, executives said on a conference call.

"PeopleSoft in the large enterprise market can pull the manufacturing expertise from J.D. Edwards up into our product line, and J.D. Edwards can pull the HR and (enterprise resource planning expertise) down in to the midsized market," PeopleSoft CEO Craig Conway said on the call.

However, one analyst cautioned that by the time PeopleSoft and J.D. Edwards smooth out the integration issues arising from the merger, the "fertile" opportunities in the midmarket range could be gone. PeopleSoft's last large acquisition--that of customer relationship management specialist Vantive in 1999--took several years to be integrated efficiently.

"There's a lot of duplication in functionality so it will be interesting to see how all the integration issues work out," said Ted Kempf, an analyst at Gartner Research.

CNET News.com's Sandeep Junnarkar contributed to this report.