People power to derail Oracle plans?

The company's biggest obstacle to acquiring PeopleSoft may be thousands of customers who fear their multimillion-dollar software investments are in jeopardy.

Alorie Gilbert Staff Writer, CNET News.com
Alorie Gilbert
writes about software, spy chips and the high-tech workplace.
Alorie Gilbert
7 min read
Oracle's biggest obstacle to acquiring rival PeopleSoft may be thousands of customers who fear their multimillion-dollar software investments are in jeopardy.
Read more about Oracle and PeopleSoft

Oracle CEO Larry Ellison sent shockwaves through the industry last month when he launched a hostile bid for PeopleSoft, just days after Pleasanton, Calif.-based PeopleSoft announced plans to acquire J.D. Edwards for $1.7 billion. PeopleSoft and Redwood Shores, Calif.-based Oracle compete in the market for broad-based business applications, an area in which Oracle has had little success using its commanding lead in database software as an advantage.

At the time, Ellison said he planned to discontinue selling and developing his rival's technology and persuade users to switch to Oracle applications in a bid to gain market share.

The statements made by the outspoken CEO angered many of PeopleSoft's 5,100 customers, which have only just completed installing PeopleSoft applications in the past few years. A handful of customers, recently interviewed by CNET News.com, expressed deep apprehension at the prospect of Oracle swallowing the company they rely on to maintain the systems that keep their organizations running smoothly. Each gave the deal a resounding thumbs-down.

Chief among their concerns are the level of support and maintenance Oracle would provide for PeopleSoft technology and the cost of moving to another set of applications when Oracle's support runs out. The prospect of starting all over should PeopleSoft be bought by Oracle is an odious one, because most customers expected their investments to last 10 years or more.

"You're talking about a pretty significant system conversion" to Oracle, said one PeopleSoft customer at a Connecticut insurance company, who requested anonymity. "That's disruptive to businesses that have years invested in customizing and designing these systems. To have to rip that out for no additional gain, that just doesn't make any business sense."

Disgruntled PeopleSoft customers could throw a wrench in Oracle's grand merger plans. For one thing, their concerns about having less choice in the business applications marketplace could become central to the antitrust debate surrounding Oracle's bid.

Furthermore, a special money-back guarantee from PeopleSoft, which promises customers a refund of between two and five times their purchase price should Oracle discontinue the company's products, could cost Oracle up to $354 million.

PeopleSoft has received a steady flow of feedback from customers and customer support groups, all endorsing its efforts to fend off Oracle. Their main message: If Oracle prevails, it could cost companies untold millions in wasted information technology investments and business disruptions.

Larry Ellison, Oracle CEO Oracle has since sought to soften Ellison's initial comments and has promised to support PeopleSoft products for at least 10 years and to provide free replacement software if the bid proves successful.

Ellison on Wednesday again said he is determined to acquire PeopleSoft, even if it takes another year. He also sought to dispel fears that Oracle would not support PeopleSoft products in the aftermath of an acquisition. "It's utterly ridiculous to offend the customers we spent $6.3 billion to acquire," Ellison said. He added that Oracle was "committed" to keeping PeopleSoft's customers happy.

Representatives of PeopleSoft's customer base are depending on the power of their collective voice to prevent the acquisition. "We feel strongly that an Oracle acquisition of PeopleSoft would reduce competition," Peg Nicholson, president of the PeopleSoft International Customer Advisory Board, said in a statement released earlier this month. "The ICAB recommends that customers and potential customers of PeopleSoft take every opportunity to register their concern with this clearly anticompetitive tender offer."

Oracle's antitrust hurdle was raised higher in recent weeks when the Department of Justice signaled an expanded investigation of the deal, requesting more information from Oracle and possibly stymieing the deal's progress for months. That same day, Oracle announced a "customer outreach campaign" reiterating promises of support for PeopleSoft users.

"It is not necessary for PeopleSoft customers to migrate to a new platform for this acquisition to be compelling for our shareholders and for PeopleSoft customers," Charles Phillips, executive vice president of Oracle, said in a statement announcing the campaign. "Keeping PeopleSoft customers satisfied on whichever product they choose to use is a top priority."

The success of an Oracle acquisition ultimately depends on its ability to retain many of PeopleSoft's customers, at least 60 percent of which are already Oracle database customers. If customers feel mistreated by Oracle, they could defect to SAP, Microsoft and other rivals that are only too eager to step in and capitalize on the market upheaval.

There for the next decade?
Yet some are skeptical of Oracle's assurances that it will support PeopleSoft products over the next decade. "I don't know of any software company that supports a 10-year-old product and continues to update it for tax code changes and other such requirements," said Mary Lynne Perushek, chief information officer of Young America, a marketing services company. "I find that slightly unbelievable."

Many customers say that if PeopleSoft disappears, a lack of competition could lead to higher prices and lower quality in the market overall. Others worry about how well Oracle would be able to serve customers in market segments PeopleSoft has specialized in and that Oracle hasn't traditionally catered to, such as health care and education.

Ginger Bonham, financial systems administrator at Health First, is critical of Oracle's ability to provide applications to health care organizations because of the company's lack of focus on that market in the past. "If Oracle thinks they are going to keep the health care community, they will be sadly mistaken," she said.

Bonham said that if Oracle does discontinue PeopleSoft's products, that will leave Health First, which runs a set of hospitals and health care facilities throughout the state of Florida, with few alternative software suppliers. Lawson Software, which also specializes in health care applications, but is much smaller than Oracle, was the only other choice she could name.

Universities, another traditional PeopleSoft stronghold, are similarly worried about a lack of competition in a software market recast by Oracle. Besides PeopleSoft and Oracle, the only other major higher education competitor is SCT in Malvern, Pa., said David Makowski, assistant vice president of information systems at the University of Colorado.

"I'd like to see more than two vendors out there," Makowski said. "It's healthier for us in terms of vendors competing to make products richer and to pay attention to innovation. It puts us in a better position on the price side of things, too."

The university has spent $35 million on its PeopleSoft human resources and financial systems over the last five years, Makowski said.

Others expressed doubt about Oracle's support for rival technology, particularly for companies running PeopleSoft applications on databases from Oracle archenemies IBM and Microsoft. "Even if this was a friendly takeover and everything was rosy, I just don't see Larry Ellison supporting (Microsoft Chairman) Bill Gates' database platform," said the customer who requested anonymity. "There's a significant segment of the PeopleSoft customer base that has to be really concerned about that."

Among them, is Smead Manufacturing, a maker of office supplies that swapped out its Oracle database three years ago in favor of Microsoft SQL Server. The company saved millions on licensing costs as a result, said Mike DeSorda, an information systems manager at Smead. "That would probably deter us from moving to Oracle applications," he said.

Sales tactics a concern
Even organizations running PeopleSoft systems on Oracle databases say past experiences with Oracle, notorious for its hard-charging sales practices, make them wary of letting more Oracle technology in the door. For example, Oracle angered more than a few database customers a couple of years ago when it changed its database licensing plans, resulting in higher overall prices for some businesses.

"Oracle has the reputation that they really look after their bottom line, and they have good database technology, which gives them leeway to press customers," said the University of Colorado's Makowski. "With Oracle, there is a history of some distrust."

Yet, even PeopleSoft has committed the occasional customer faux pas. In the late 1990s it released a buggy version of its student administration application for schools and universities. Dozens of universities struggled to install the systems, resulting in operational disruptions and budget overruns on numerous projects.

Craig Conway, PeopleSoft CEO Because PeopleSoft fixed many of the early glitches, most universities buried the hatchet with the company, said Joe Taylor, director of administrative computing services at the University of Utah. "Our institution's feeling is that we have put that behind us, we are marching ahead, and we have created a good relationship with PeopleSoft," he said. "I haven't heard of a single one of my peer institutions that is welcoming (an Oracle buyout) because of earlier dissatisfaction with PeopleSoft."

That kind of customer loyalty, coupled with PeopleSoft's money-back guarantee, helped the company surpass earnings targets in the quarter ended June 30.

By announcing its bid just three weeks before the end of PeopleSoft's second quarter, Oracle could have plunged its rival into chaos during a critical sales period. If PeopleSoft had missed sales targets for the quarter, its stock price could have plummeted, making Oracle's $19.50-per-share offer more tempting to shareholders. If that was indeed Oracle's strategy, it backfired. PeopleSoft's shares closed up 1 percent from the previous day to $17.98 on July 2, the day it announced preliminary earning results

On a teleconference call with securities analysts that day, Craig Conway, chief executive of PeopleSoft, declared an initial victory in the battle for the support of customers. "I think there was cumulative brand damage to Oracle as the last three weeks unfolded," he said. "There a remarkable outpouring of support for PeopleSoft from customers. We got calls from CEOs to board members and throughout IT."

As for the shareholder wrangling and courtroom clashes that are still raging over the proposed merger, Conway and Ellison could be locking horns for some time to come.