Oracle on Friday announced a surprise $5.1 billion takeover bid for enterprise software maker PeopleSoft, only a few days after PeopleSoft said it was acquiring rival J.D. Edwards for $1.7 billion.
Oracle is offering $16 cash per share for each share of PeopleSoft, a roughly 6 percent premium over PeopleSoft's closing price Thursday of $15.11.
Oracle said it will begin the tender offer on Monday and that it is being advised by Credit Suisse First Boston, which was also providing bridge financing. Oracle has about $6 billion in cash.
In a statement, PeopleSoft CEO Craig Conway said the offer amounted to "atrociously bad behavior from a company with a history of atrociously bad behavior. Obviously it is a transparent attempt to disrupt the acquisition of J.D. Edwards by PeopleSoft announced earlier this week."
The statement added: "PeopleSoft and its board of directors is required by law to review all cash tenders regardless of intent, and will provide a definitive recommendation to shareholders shortly thereafter. In the meantime, PeopleSoft advises its shareholders to take no immediate action."
Oracle said if it completes the acquisition of PeopleSoft, it would "review whether, and on what terms" it would support the J.D. Edwards deal.
"The acquisition of PeopleSoft will immediately make Oracle an even more profitable and competitive company," Oracle CEO Larry Ellison said in a press release.
Even if this is true, Oracle has struggled mightily to take the applications business away from PeopleSoft, with limited success. It is perhaps a telling sign for Oracle's fortunes that cofounder Ellison, who not long ago railed against Microsoft as his arch enemy, has set his competitive sights considerably lower.
Ellison made clear that Oracle has no intention of keeping PeopleSoft alive as a separate brand, should the deal go through. "Although we will not be actively selling PeopleSoft products to new customers, we will provide enhanced support for all PeopleSoft products. Furthermore we will be incorporating the advanced features from the PeopleSoft products into future versions of the advanced Oracle eBusiness Suite," he said.
Ellison said in a conference call that PeopleSoft's Conway approached him about a year ago "about combining the PeopleSoft application business with the Oracle application business. At that time, a year ago, we were unable to agree on structure."
The Oracle chief also said that his company "continued to follow PeopleSoft closely" and "thinks the time is right to offer shareholders an alternative plan" to what PeopleSoft's management has presented.
A PeopleSoft spokeswoman, however, disputed Ellison?s account.
"We never discussed the sale of PeopleSoft or a merger of the two companies," said the spokeswoman. "What we did talk about was Oracle exiting the applications business and selling their applications business to us."
Earlier this week, analysts said the proposed combination of Peoplesoft and J.D. Edwards could increase competitive pressures on Oracle and enterprise resource planning (ERP) software market leader SAP.
J.D. Edwards spokesman Victor Chayet said "the details of the agreement between PeopleSoft and J.D. Edwards have been filed and are available with the SEC. Until Oracle files their tender offer, it will be difficult to respond directly to their tender offer."
at a glance
Business:Develops database and applications software used by companies in sales, procurement, supply chain, manufacturing and human resources.
Chairman, CEO: Larry Ellison
CFO: Jeff Henley
Sales: $9.4 billion*
EBITDA: $3.8 billion*
Market capitalization: $70 billion
*Represents revenue for the four quarters ended Feb. 28
Ted Kempf, an analyst with market researcher Gartner said Oracle's proposed deal could effectively freeze demand for PeopleSoft's products. "This (proposal) is not good for PeopleSoft in terms of their current pipeline (or for) anybody that's contemplating going with PeopleSoft in current purchases or new purchases. My recommendation to people would be to hold tight...I wouldn?t make any massive purchases right now."
Shares of Peoplesoft rose 18 percent, to $17.94. Oracle shares slipped 27 cents to $13.09.
Clear as FUD?
Oracle, which leads the market for database software, has for years
struggled to grow its application software business. Despite those efforts, the bulk of Oracle's revenue still comes from database software. Forrester Research analyst Laurie Orlov noted in a report this week that the company's application software business has declined to 26 percent of Oracle's overall revenue.
Kempf said the Oracle deal adds to the already high level of uncertainty in the enterprise software business. "There's going to be a lot of FUD (fear, uncertainty and doubt) in the market."
He said Oracle's offer "looks (like) a move to simply get customers, and more importantly push aside a competitor."
The Oracle announcement, coupled with the Peoplesoft and J.D. Edwards deal announced on Monday, comes after a flurry of consolidation in the normally staid enterprise software market. Invensys on Tuesday said that it had sold Baan, the financially troubled software maker, for $135 million to a group of investors.
Hostile bids in the software business are unusal but not unheard of. For instance, eight years ago this month, IBM initiated a hostile offer for Lotus Development that resulted in a $3.5 billion acquisition of the software maker.
Oracle is the world's No. 2 software maker, posting sales of $9.7 billion in 2002. The combination of PeopleSoft and J.D. Edwards would create a company with annual revenue of $2.8 billion.
The PeopleSoft deal should increase Oracle's earnings per share from the first combined quarter, Jeff Henley, Oracle's chief financial officer, said in a press release, adding that the company expected "minimal business integration risk."
"Because we're not trying to keep both of these businesses alive, there's a lot more synergies to get out of it," Henley said in a conference call.
And Ellison said the combination of Oracle and PeopleSoft would save more money than PeopleSoft's proposed merger with J.D. Edwards.
"Theirs is an acquisition of (expansion); they're moving into a lot of new markets. Ours is an acquisition of consolidation," Ellison said. "These overlaps and consolidation allow us to, on the one hand, save money; on the other hand, make a lot of improvements. Their current plan is to enter a lot of new markets, and that's
why we believe they're unable to come up with the savings."
The corporate cultures of Oracle and PeopleSoft couldn't be farther apart, according to some former employees. Oracle is a haven for aggressive personalities who thrive on intense competition. To motivate the sales staff, managers have posted an individual's progress in achieving his or her sales goals on the wall during quarterly meetings. The competitive atmosphere leads to routine reorganizations.
By contrast PeopleSoft, founded by a Cornell University graduate, Dave Duffield, projects a Hewlett Packard-like image of being more collegial. The sales staff often relies on customer recommedations to complete a deal. To some extent, this was necessary because the applications market had already been well established by Oracle and SAP by the time PeopleSoft emerged.
at a glance
Business:Provides software for customer relationship management, human resources, financial management and supply chain management.
Chairman: David Duffield
CEO: Craig Conway
Sales: $1.9 billion*
EBITDA: $350 million*
Market capitalization: $4.8 billion
*Represents revenue for the four quarters ended March 31
Henley said Oracle had submitted a letter to PeopleSoft's board of directors, asking to discuss the offer with them.
According to a PeopleSoft spokeswoman, Oracle faxed a letter to PeopleSoft's board of directors with the buyout offer Friday morning, after Oracle had already issued a press release on its plans. "Basically, they are not really interested in a combination with us. If they were, they would have come to us directly before publicly announcing their plans," she said. "This is just an effort to disrupt our operations and the J.D. Edwards transaction."
Ellison said that an acquisition would have advantages for PeopleSoft customers, because the company would extend support for PeopleSoft's current product. Ellison said PeopleSoft would stop supporting the current product and require customers to upgrade to a new version by the end of the year.
"We're going to extend support and let them upgrade at a time of their own choosing. We won't charge additional licensing to go from PeopleSoft 7 to PeopleSoft 8, or if they choose to upgrade to Oracle eBusiness Suite," Ellison said.
Financial analysts questioned whether the $16 offer would be high enough to get the deal done.
"We think it would be unlikely that PeopleSoft would be purchased for only a 6 percent premium," UBS Warburg analyst Heather Bellini wrote in a research note. "PeopleSoft has not made comments to confirm deal. Also, the premium that Oracle is offering again highlights the low growth opportunities in the entire application software market."
Bellini said the deal, if completed, would be Oracle's way "to directly compete with SAP and address its apps strategy, which has not been very successful."
In a prepared statement, SAP spokesman Markus Berner said, "In the event of a successful (acquisition), the landscape will change. SAP will still be the undisputed leader with 54 percent market share. But we would then have a clear No. 2 competitor. This would give us the opportunity to be even more focused."
Separately on Friday, Oracle said that it expected to meet or exceed consensus estimates for its fourth fiscal quarter. The company said it should post earnings per share of 14 cents to 15 cents for the quarter ending May 31.