Courtroom courtship for Oracle and PeopleSoft?

Everyone from Oracle CEO Larry Ellison to senior members of PeopleSoft's board has taken the witness stand and savaged his or her counterpart's character and business strategies, a tactic seemingly calculated to nudge up or down one crucial number: Oracle's current offer to pay PeopleSoft stockholders $21 a share in its takeover bid.

As the trial winds down, it's become clear that PeopleSoft's board is now willing to sell--though only if the price is right. Former CEO and board member Craig Conway may have been reticent, but his forced departure, just before the trial, began opening the door to a possible agreement.

"Possible," though, is a far cry from "certain": Oracle wants to pay less. PeopleSoft is demanding more. The trial in Delaware's Court of Chancery, where Oracle is attempting to eliminate PeopleSoft's "poison pill" defenses, became the two companies' public negotiating forum.

Consider the evidence: In a this-is-the-best-you-might-get ploy, Ellison indicated last week that Oracle was having "discussions" about reducing its offer to less than $21 a share. Then, on Monday, Oracle co-president Safra Catz took the stand to say that PeopleSoft's financial condition had dropped by 25 percent to 33 percent, which conceivably would reduce Oracle's offer from $7.7 billion to just more than $5 billion.

Employing what was supposed to be no-holds-barred litigation to jockey for a higher or lower price tag eventually drew a mild rebuke from Judge Leo Strine, the vice chancellor of the Delaware court who is overseeing the trial. On Tuesday, Strine quipped that the trial had become part litigation, part business deal.

Oracle's offer has already zoomed up and down a few times from the company's initial $16-a-share bid. The database software company said in February that it expected its rival to earn 85 cents a share in 2004 and upped its tender offer from $19.50 to $26 a share. Then, in May, Oracle revised its bid to $21, citing a decline in PeopleSoft's value.

One remaining obstacle to a friendly acquisition is that PeopleSoft shareholders are holding out for a hefty takeover premium, which is customary in the software business. When Hewlett-Packard bought Novadigm this year, it paid a 28 percent premium, and Juniper Networks bought NetScreen Technologies at a hefty 57 percent premium.

For Oracle, that means a winning bid might be somewhere in the $25-to-$30 range, a price that the company could afford--if Ellison and his board could countenance writing that large a check.

The right price?
Complicating any negotiations is the painstaking process of wooing institutional and mutual-fund holders. They hold 71 percent of the 367 million shares of PeopleSoft outstanding and 80 percent of shares that are publicly traded.

A representative of one large shareholder, who trekked down to the courtroom from New York each day and spoke on condition of anonymity, said Oracle could afford to pay as much as a figure in the mid-$30s, but an acceptable figure would be in the high $20s. Other major investors have hired local lawyers from Wilmington firms to attend the trial and phone in major developments when they happen.

Then there's David Duffield, PeopleSoft's chairman, a founder and now its CEO, who owns at least 48 million shares himself--a sizable 13 percent stake in the company. In a taped deposition that was played in court this week, Duffield essentially demanded a higher dollar figure, saying Oracle's original offer would have been taken more seriously if it had been more generous.

Steven Goldby, a PeopleSoft board member who chairs the governance committee, was more blunt. He testified that there was a "high certainty" that the negotiations could end happily if Oracle would only up its offer and if the board concluded that the deal could take place quickly.

If Oracle and PeopleSoft reach that deal, few other obstacles stand in the way of completing it. The U.S. Department of Justice's quixotic scheme to block the proposed acquisition was soundly rebuffed by a federal judge in San Francisco, and the government reluctantly said on Oct. 1 that it won't appeal.

On Thursday, A. George "Skip" Battle, a PeopleSoft board member and chairman of the transactions committee, said he believed European regulators would not object to the combination of the two large software companies--and, like his fellow directors who testified before him, warned that $21 a share simply wasn't generous enough to make a deal happen.

One thing is certain: Oracle definitely wants to buy PeopleSoft, and perhaps even needs to buy the Pleasanton, Calif.-based company to keep revenue growing and its own shareholders happy. Ellison acknowledged as much, testifying that PeopleSoft is by far the most tempting potential acquisition, and that it has been No. 1 on Oracle's list of companies to purchase for at least the last four years. The software business is going through a period of contraction, Ellison cautioned, where survival means consolidation.

But Ellison doesn't seem to be in any hurry. It's been more than 16 months since Oracle announced its intention to buy PeopleSoft, and Ellison was patient enough to sit through a nerve-wracking Justice Department trial. Now he may be willing to wait a few more months and see whether Delaware's courts will eliminate the poison-pill defenses, which would effectively make the company cheaper to buy.

If that doesn't work? Oracle director Joseph Grundfest acknowledged on the witness stand that the bid could be revised yet again. But Grundfest, of course, didn't say in which direction.