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Commentary: PeopleSoft on the brink

With Oracle raising the stakes in its hostile takeover bid, PeopleSoft customers had better be prepared to make migration plans.

Commentary: PeopleSoft on the brink
By Forrester Research
Special to CNET News.com
June 18, 2003, 1:40PM PT

By Bruce D. Temkin, Principal Analyst

On Wednesday, Oracle raised the stakes in its hostile takeover bid for PeopleSoft. The implication? Oracle will likely close the deal--forcing PeopleSoft customers to make migration plans.

Oracle raised the price of its takeover offer to $19.50 per share--a 22 percent increase over its June 6 offer. Based on this offer, we now believe that the deal will likely go through. In an early morning call with Oracle executives Jeff Henley and Chuck Phillips, we heard the current state of Oracle's aggressive takeover plans. Here's what it all means:

• The bid represents notable progress for shareholders. At $19.50 per share, the all-cash price represents a 29 percent premium over PeopleSoft's closing stock price on the day before the original offer was announced. While the initial price represented a low-ball offer, this new deal provides a significant cash out for PeopleSoft investors who want to escape from the declining enterprise applications market. If shareholders get excited about this new offer, there might be enough backlash to dissuade PeopleSoft's board from going ahead with that company's deal to take over J.D. Edwards.

• Oracle will suffer through a transition. While Oracle claims that cost cuts will make the acquisition appealing, we believe that the software maker will find it difficult to realize those savings at the same time that it's trying to retain the PeopleSoft customer base. With Oracle aggressively pushing its E-Business Suite, we expect to see a significant backlash from PeopleSoft users--opening up a wave of new opportunities for SAP.

• PeopleSoft customers need contingency plans. Oracle claims that it will continue to support customers on PeopleSoft versions 7 and 8--and gladly will sell additional licenses for these products. They


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also plan to offer these customers a license for free upgrades to matching Oracle modules--when customers are ready to upgrade. But we believe that the combination of expected Oracle cutbacks and PeopleSoft employees fleeing to find new jobs will severely diminish PeopleSoft support levels. We also expect that Oracle will grow increasingly impatient with PeopleSoft platform holdouts as it tries to gain the economic benefits of supporting a single platform. The impact: PeopleSoft customers will need to actively consider migration plans--to Oracle E-Business, to a competitor like SAP or to an applications outsourcer.

• PeopleSoft applications outsourcing will boom. In the wake of support uncertainty for PeopleSoft applications, we expect that users will increasingly look for outsourcers to handle maintenance. Look for offshore outsourcers such as Wipro Technologies, Infosys Technologies and Tata Consultancy Services to roll out aggressive programs to maintain PeopleSoft human resources and financial modules--staffing up with some high-quality former employees of PeopleSoft.

• Siebel Systems will look even smaller. As the Oracle drama plays out, Siebel should be able to attract customers on the cusp of deciding between Siebel's or PeopleSoft's customer relationship management (CRM) offering. But Siebel can't just stand by and do nothing. Within 18 months, we expect that Oracle will regroup its sales and marketing efforts to regain momentum in CRM. To keep up in a marketplace that will be increasingly dominated by two very large, full-suite vendors--Oracle and SAP--Siebel must expand its footprint. A couple of options: Purchase J.D. Edwards if the deal with PeopleSoft falls through, or expand more aggressively into the midmarket with an acquisition of Salesforce.com.

• There'll be a glut of former PeopleSoft employees. To make the economics of the deal work, Oracle plans to make quick and significant cost reductions. Look for the acquirer to immediately chop executives, nonbillable consultants, salespeople, product marketers and corporate marketers from the payroll. Next on the list will be customer service representatives and finance staffers.

© 2003, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.