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Trying a 'landmark case'

Although Oracle's legal team might be outrunning the Justice Department, CNET News.com's Karen Southwick says the race is a marathon, not a sprint.

Long after the outcome of Oracle's hostile bid for PeopleSoft is decided, the implications of the closely watched trial to overturn the Justice Department's challenge to the merger will linger.

Not because of its impact on the rather narrow field of business application software, but because it may set a sweeping legal precedent on competition in general.

Oracle's lead attorney, Dan Wall, summed it up in his opening arguments on Monday. "This is likely to be the landmark case in unilateral effects," he told a packed house in the San Francisco federal court. In ongoing merger law, U.S. antitrust regulators are worked up about "unilateral effects," or the impact that a single merged firm--such as Oracle/PeopleSoft--would have on pricing, innovation and competition.

By contrast, European regulators have been concerned about whether a proposed transaction would give the merged firm(s) a dominant market position in terms of "coordinated effects." That is, after the merger, two firms would have a combined share of 80-90 percent or more of the relevant market and .

Oracle's team of high-price outside attorneys appeared to be doing a better job of outlining its case than the government's did.
The Justice Department's attorney, Claude Scott, didn't have the same command of soundbytes as Wall. He earned the impatience of U.S. District Judge Vaughn Walker, who is presiding over the nonjury trial, expected to last four weeks.

Scott attempted to bolster the government's case for unilateral effects by arguing that despite industry leader SAP's 39 percent global market share in business application software, it isn't a viable option for many U.S. companies. "Often, SAP is ruled out because of its architecture and high cost of installation."

Wall contended that the government "doesn't really have a case" but is trying to use "vignettes and anecdotes," mostly from customers, to picture the competitive fallout that would occur in reducing the business applications market from three primary players (SAP, Oracle and PeopleSoft) to two (SAP and Oracle). "This is different from traditional antitrust collusion theory," he said.

Walker, who appears to have a penchant for soundbytes, quipped in response: "It's easier to wink and nod at one person in the room than two."

Maybe Walker and Wall are the only two who get it. Nonetheless, in the first few days of testimony, Oracle's team of high-price outside attorneys appeared to be doing a better job of outlining its case than the government's did. Of course, that doesn't signal a forgone decision, since Walker is known for being a stickler for the law rather than presentation.

But Wall is right on when he calls this a "landmark case." First, it's very rare for companies to challenge government antitrust suits and rarer still for it to happen in information technology.

Oracle represents a "landmark case," because so much of it pivots around the unique cultures of the two companies involved.
Probably the only recent precedent is a 2001 case in which SunGard, a disaster recovery company, got a Justice Department lawsuit overturned that sought to block its $825 million acquisition of a rival unit of Comdisco.

In the Oracle case, the government's position is stronger, first because the target of the bid, PeopleSoft, wants to get off the hook and is cooperating with the Justice Department. By contrast, Comdisco was in bankruptcy and wanted to proceed with the sale.

More importantly, Oracle represents a "landmark case," because so much of it pivots on the unique cultures of the two companies involved. In fact, so unique are those cultures--in particular, Oracle's--that we may never see another case like this one.

Oracle's culture flows from the ruthless, take-no-prisoners attitude of the man at the top, Chief Executive Larry Ellison. With Oracle losing ground in the business applications market and barely holding its own in the core database market, Ellison went for the jugular--of PeopleSoft.

In a stunning strategic move, he launched a hostile bid for his rival--headed by former Oracle executive Craig Conway. No takeover could have been as repugnant for Conway or PeopleSoft, which has always prided itself on being a kinder, gentler place to work for employees and more caring of customers and partners. If the buyout offer had come from IBM or Microsoft, would PeopleSoft have been as repulsed?

Wall contends that in the new era of customer leverage, PeopleSoft won't be missed. Customers have the ability to negotiate with Oracle or SAP or with other vendors for what they need in business applications. The Justice Department's team, however, is correct in asserting that this "leverage" is heavily concentrated in larger customers. Smaller ones won't find it as easy to negotiate.

Oracle--like IBM, Microsoft and SAP--is what Wall defines as a "stack player." These companies provide not just applications but a stack of technology--such as database in Oracle's case, hardware platforms in IBM's, Web services in SAP's, etc.--to run underneath. "PeopleSoft lacks the resources to become a stack player," he said, implying that if not Oracle, someone else will ultimately acquire the company.

Interestingly, the revelation that Microsoft last year explored merging with SAP suggests that even the world's largest software company sees weaknesses in its stack. Wall seized upon that news as favorable to Oracle's argument for taking over PeopleSoft, because the Justice Department has discounted Microsoft's role as a competitive threat in the business applications market. But the reasoning could as easily be applied the other way: Microsoft is so concerned about making inroads that it saw no other options but a merger.

Walker has some amusing camaraderie with Oracle. The way he runs his courtroom is not too different than the way Ellison runs Oracle: as a one-man show. On the opening day of the trial, the judge strolled in nearly an hour after the appointed starting time with no explanation for his late appearance, leaving everyone else to wait. It's a tactic often employed by Ellison. Walker's pointed questioning of a rather beleaguered Scott, the Justice Department's lead attorney, and of the first customer witness, Cox Communications' Scott Allen, is also at least faintly reminiscent of Ellison's relationship with subordinates.

"Take a lesson from Smarty Jones," Walker told the courtroom in an enigmatic reference to the horse that couldn't scoop up the last leg of the Triple Crown. "No matter how grueling the race, it's always important to relax in the backstretch." Ellison couldn't have said it better.