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Takeover attempt takes its toll

A year and counting: Oracle's hostile bid for PeopleSoft has left both companies the worse for the wear, analysts say. And the end may not be in sight.

You have to give Oracle points for determination.

The software company has been thwarted at nearly every turn in its effort to acquire rival PeopleSoft, and that may have just been a warm-up. Oracle will head to U.S. District court on Monday to defend its hostile $7.7 billion bid against federal trustbusters, who say the proposed buyout would result in price hikes for software that big companies use to organize their accounting, sales and human resources activities.

The trial will start just as the takeover effort passes the one-year mark. It began, to PeopleSoft's surprise, on June 6, 2003. Although a verdict is expected within a month or two, few see a quick resolution to the bitter clash.


What's new:
Exactly a year after making its surprise bid to acquire PeopleSoft, Oracle will face a big challenge: beating antitrust regulators in court.

Bottom line:
The case starts June 7 and is expected to last about a month. But observers say that regardless of the outcome of the Justice Department's suit, the takeover drama--which has hurt both companies--could drag on another year or more.

More stories on Oracle's bid

If the U.S. Department of Justice has its way in court, Oracle may appeal the ruling. And if Oracle prevails, it faces another antitrust review by European regulators and an unfriendly PeopleSoft board, which has rejected four Oracle offers and readied a "poison pill" anti-takeover defense.

"This thing could drag on for another year or more," AMR Research analyst Jim Shepherd said.

But Oracle's tenacity comes at a price. It and PeopleSoft have suffered from the takeover tango, according to analysts.

The uncertain outcome of the merger bid has weighed on Oracle's stock price. The company's shares closed at $11.15 on Wednesday--nearly a 52-week low--despite an upswing in licensing revenue in recent quarters. On the line are Oracle's plans to expand and diversify its business, following a period of relative stagnation. Earlier this week, equity analysts underscored the problem: Prudential Financial analyst Brent Thill, for instance, reduced his rating for the company, saying Oracle's long-term growth prospects appear limited without the help of an acquisition.

The Oracle-PeopleSoft saga


June 2--PeopleSoft agrees to buy J.D. Edwards in a $1.7 billion friendly deal.
June 6--Oracle launches a surprise $5.1 billion hostile bid for PeopleSoft, offering $16 per share in cash.
June 13--PeopleSoft files suit against Oracle, alleging that the rival company sought to damage it with the bid.
June 17--PeopleSoft introduces a customer refund plan as protection against Oracle's bid.
June 18--Oracle files suit, trying to eliminate PeopleSoft's poison pill takeover defense, and raises its bid to $19.50 per share--a total of $6.3 billion.
June 30--The U.S. Department of Justice initiates an extended review of Oracle's bid.
Aug. 29--PeopleSoft completes the J.D. Edwards merger.
Nov. 17--The European Commission begins an in-depth review of the Oracle bid.


Feb. 4--Oracle raises its bid for a second time, offering $26 per share, or $9.4 billion.
Feb. 26--The Justice Department and seven states file a joint suit to block the takeover, after which three more states join.
March 12--The European Commission issues preliminary objections to the Oracle bid.
April 15--The European Commission postpones its ruling for a second time, awaiting Oracle documents. No new deadline is set.
May 14--Oracle reduces its bid to $21 per share, or $7.7 billion, following a decline in PeopleSoft's share price.
June 7--The antitrust trial is set to begin in federal court in San Francisco.

For PeopleSoft, the damage has been even more palpable. Despite a money-back-guarantee program designed to protect customers' purchases, PeopleSoft admits that the Oracle bid has put a dent in sales and has cost the company a bundle in legal charges and related fees.

PeopleSoft employee morale has taken a hit, too. The company has endured a rash of executive departures, including those of several top-ranking managers in charge of major product lines.

All this has sent PeopleSoft's stock skidding over the past six months. It closed at $17.65 on Wednesday, down from a brief high just above $24 in January. In response to the ongoing decline, Oracle reduced its offer last month from $26 a share to $21, taking about $1.7 billion off the table.

"(The Oracle bid) has clearly been detrimental to PeopleSoft's business; they've been upfront about that," Pacific Crest Securities analyst Brendan Barnicle said. "And you didn't see a bunch of business flooding back after the Justice Department decision" to oppose the deal.

PeopleSoft customers are still disturbed by Oracle's initial pledge to shut down its takeover target, a prospect Oracle CEO Larry Ellison appeared to relish in the early days of the bid, said Mike TenEyck, manager of administrative systems at Texas Christian University and president of the PeopleSoft Higher Education User Group. With his characteristic swagger, the Oracle chief promised to gut the company's staff and phase out its products. After setting off a panic wave, Oracle executives said they'd support PeopleSoft's products for 10 years.

"I think PeopleSoft is going to come out fine on this," TenEyck said. "But when Larry Ellison says what he says (about dismantling PeopleSoft), it makes you think twice."

Selling business applications (chart)

More troubling yet is the fact that Oracle and PeopleSoft have lost ground over the past year to rival SAP, the market share leader in business applications and the most powerful player in the space, analysts say. Sales at SAP are humming along, particularly in the United States, putting further distance between the German company and its two closest rivals.

While Oracle and PeopleSoft duke it out, SAP has concentrated on launching its version of an emerging technology expected to make application software easier to modify and install. The company is touting its latest versions of NetWeaver, a set of software development and interoperablity tools, as a major innovation.

"I don't see any new, daring, bold initiatives coming out of the Oracle or PeopleSoft camps," Forrester analyst Byron Miller said. "They've been in stasis all year; it's opened more doors for SAP."

Both Oracle and PeopleSoft declined to comment for this story.

Too many alternatives?
Wall Street worries that an antitrust ruling against Oracle would interfere with the Darwinian forces reshaping the battered software industry. The number of players needs to shrink, investors and observers say, for survivors to maintain the high profits to which they're accustomed and to unleash a new wave of growth.

Investors often welcome software buyouts, because with a glut of suppliers, companies can limp along for years--never failing but never thriving. "Software companies are like cockroaches; they're really hard to kill," Merrill Lynch analyst Jason Maynard said. "They can exist on maintenance fees for ages, but it's not necessarily great for the stability of pricing."

Special coverage

The judge's line of questioning will be
a key indicator of whether he's inclined
to overrule a federal challenge to
Oracle's hostile bid for PeopleSoft.

Adding to the competitive pressure is the comeback of subscription software companies such as Salesforce.com and NetSuite. As an alternative to the pay-up-front model SAP and PeopleSoft use, they collect small monthly fees for delivering applications over the Web.

Some analysts argue that the Oracle case won't significantly affect the course of the industry. The vast majority of acquisitions, typically friendly, proceed unhindered. Spectators are drawn to the drama, AMR Research's Shepherd said. Outrageous public exchanges between Oracle's Ellison and PeopleSoft chief Craig Conway have made for good entertainment.

"You've got people like Larry and Craig, who love the publicity and have giant egos and hate each other," Shepherd said. "We don't get those kinds of sparks very often in this industry."