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Oracle-PeopleSoft merger hits one-year mark

While the newly combined company has largely moved ahead as planned, the overall success of the merger is still a mixed bag.

And who said it wouldn't last?

After a contentious, protracted courtship, the Oracle-PeopleSoft merger has hit its one-year anniversary mark, with the post-merger marriage going relatively smoothly. PeopleSoft customers have not defected en masse in search of better software applications, and Oracle executives have touted a relatively quick integration of the two former rivals since the deal closed last year on Jan. 7.

But while the operations of the newly combined company have largely moved ahead as planned, the overall success of the merger in its first year has been a mixed bag. The company's stock remains lackluster, and uncertainty still persists as to whether PeopleSoft customers will ultimately adopt Oracle's software once the technologies are integrated into its line of Fusion applications that are slated to hit the market in 2008.

"It's like saying the operation was a success, but we still have to figure out what to do with the patient's third leg," said Bruce Richardson, an analyst at AMR Research. "With the merger, Oracle got operating efficiency, but you have to ask yourself, what else did they get, once the dust settles."

Oracle has been able to retain more than 95 percent of PeopleSoft support customers following the merger, said Jeb Dasteel, vice president of Oracle global customer programs. While the company ideally hoped to hang on to all customers, it set a goal of 94 percent to 96 percent retention, he added.

"We listened to the voice of the customer and helped them with the transition. We've done a good job at keeping a finger on the pulse of PeopleSoft customers as they have migrated to the Oracle environment," Dasteel said.

Before the merger's close, PeopleSoft customers had several looming concerns.

"They were mostly worried about Oracle (bilking) them on maintenance costs," Richardson said. Oracle and other enterprise software makers typically charge customers an annual fee, based on a percentage of the software licensing cost, for upgrades and bug fixes.

Customers were also leery of Oracle discontinuing support and development for the PeopleSoft applications they were running, he added. These software suites can sometimes cost millions of dollars and often require additional assistance from consultants to install, Richardson noted.

"It's like saying the operation was a success, but we still have to figure out what to do with the patient's third leg."
--Bruce Richardson, analyst, AMR Research

That concern was particularly valid, given comments that Oracle's chief executive, Larry Ellison, made shortly after announcing plans to launch a hostile takeover attempt of PeopleSoft. Ellison touted plans to discontinue PeopleSoft products and push customers to Oracle's software.

One PeopleSoft customer noted that there have been few surprises from Oracle since the merger closed.

"It's gone fairly well, even though I'm no fan of Oracle," said Peg Nicholson, former president of PeopleSoft's International Customer Advisory Board. "They took a short amount of time to figure out what they wanted to do, and they communicated that information to us quickly."

As the 2003 ICAB president, she had voiced concerns that the merger would reduce competition and leave consumers with few alternatives if Oracle dropped support for PeopleSoft products.

And while Nicholson, chief information officer at golf ball maker Acushnet, agreed the level of customer support hasn't declined, she noted that wasn't exactly a hard thing to accomplish.

"It's no worse, but it's hard to believe it could have been worse than what we got under PeopleSoft," Nicholson said. "It hasn't gotten better, however."

Customers like Nicholson, however, remain undecided whether they will ultimately migrate to Oracle's Fusion offering.

"Fusion is not expected to be done until 2008, and then customers will evaluate the software through 2010. They're taking a wait-and-see approach," Richardson said.

Rolling out the red carpet
As the merger came to a close last year, Oracle and archrival SAP launched programs to aggressively woo each other's customers.

SAP kicked off its Safe Passage Program shortly after Oracle closed its deal last year, and expanded it in April, offering customers financial incentives to dump any PeopleSoft and J.D. Edwards applications they were concurrently running on their systems. PeopleSoft acquired J.D. Edwards before its merger with Oracle.

In June, Oracle countered with its Oracle Fusion for SAP, or "OFF SAP," program. Like SAP, Oracle offered financial incentives to SAP customers to switch.

Over the past year, SAP has lured 40 customers away from Oracle under its Safe Passage program, said Bill Wohl, a SAP spokesman, including luggage manufacturer Samsonite, which had been using technology from PeopleSoft-owned J.D. Edwards. Other companies that switched included Waste Management and European companies Veka and Yazaki Europe.

"No one believed a flood of customers would move over (to SAP) in the first year...We expect those decisions will take some time," Wohl said. "Instead, we initially focused on customers most likely to convert, and that included PeopleSoft and J.D. Edwards customers who were also running SAP."

SAP has engaged in other offensive moves against Oracle beyond its Safe Passage program, including the acquisition of third-party PeopleSoft support company TomorrowNow within two weeks of Oracle closing its PeopleSoft merger. TomorrowNow, which has been offering support to PeopleSoft and J.D. Edwards customers since 2002, has more than 100 active customers, the bulk of whom signed on after the merger closed, TomorrowNow CEO Andrew Nelson said.

For its part, Oracle says it has competed successfully against SAP in winning new customers.

"We are seeing companies consolidate software vendors and standardize on Oracle," Bob Wynne, an Oracle spokesman, said in a statement. "Companies such as Usina Nova America and Group Voyagers have recently replaced SAP and standardized on Oracle applications. Additionally, new customers such as Gianni Versace, Ingersoll-Rand and Welch Foods continue to select Oracle applications over SAP."

Oracle's $11.1 billion merger has yet to lift its languishing stock, which has remained virtually flat over the past three years and has underperformed both rival SAP and the Nasdaq composite index in the past year.

And conflicting reports have emerged over Oracle's applications licensing revenue.

Applications license revenue, an area Oracle has targeted for growth, is expected to fall to $916 million for the 2005 calendar year, a 32 percent drop compared with the companies' combined total in the prior year, according to a research report by Brent Thill, a Prudential Equity Group analyst.

Oracle, however, touted a 24 percent increase in second-quarter applications license revenue when it reported its financial results in December. But there's a catch: Oracle is comparing post-merger numbers to a year-ago total that didn't include PeopleSoft's results. As a result, analysts say, it does not provide an apples-to-apples comparison.

An Oracle spokeswoman declined to comment on Thill's assessment, noting that the company does not break out such figures.

Oracle has some backers on Wall Street, though they say it could be years before results of the merger are really known.

"We struggle with many of Oracle's claims, primarily that many of its 10-plus acquisitions over the past year are 'already integrated.'"
--Brent Thill, analyst, Prudential Equity Group

Analyst Brad Reback of CIBC World Markets said he was a "fan" of the deal when it was first announced in June 2003 and remains one today.

"They have hit most, if not all, their goals," Reback said. "They have good maintenance renewal rates and cost synergies."

He noted that during the company's last earnings report, Oracle executives indicated that the maintenance renewal rate was exceeding previous expectations and that the cost savings they expected to achieve in the year occurred within the first two quarters after the deal's close.

During Oracle's second-quarter conference call with analysts last month, Safra Catz, Oracle's chief financial officer, said: "Customers are renewing their subscriptions and buying more...In fact, PeopleSoft renewal rates are higher than when PeopleSoft was a standalone company."

Peering into the future
Although the merger has passed the one-year mark, it could be a decade before the deal can definitively be called a success or failure.

"We struggle with many of Oracle's claims, primarily that many of its 10-plus acquisitions over the past year are 'already integrated.' We believe Oracle is just beginning the integration work of its applications acquisitions, with an estimated shipment of the fused product suite expected in 2008, per management," Thill said. "Many in the industry believe this goal is simply not achievable, leaving 2009 or 2010 as a more realistic ship date for the integrated suite."

Add to that a few more years before Oracle will have customer references for its Fusion suite that it could use to attract more users to adopt the technology, analysts note.

Analysts expect customers to take a wait-and-see approach to adopting the Fusion technology before gutting expensive PeopleSoft applications that may have been difficult to install and maintain.

"Users right now are interested in protecting their current investments," Richardson said.

In the meantime, Oracle also faces increasing competition from other corners of the market, from software as a service to open-source software.

Last October, Oracle announced plans to offer free database software in response to the open-source movement. IBM has indicated that it's considering a similar plan.

Oracle is also seeing increased competition from Salesforce.com, which operates a software-as-a-service subscription business, which means customers aren't required to install software or additional hardware, but instead pay a fee for accessing service over the Web. And Oracle archrival SAP last August announced plans for hosted customer relationship management (CRM) software.

While open-source databases and software as a service are competitive threats to Oracle's business, Richardson said, Oracle faces a greater challenge in retaining customers if it bumps up its maintenance fees by a wide margin or does not listen to its customers.

"If IBM does DB2 as open source, then the threat level for Oracle will jump from about a 7 or 8 to around a 3," Richardson said. "But their biggest worry is SAP if they re-architect their whole CRM from the ground up."