Oracle's takeover attempt reveals
the database giant's uncertainty
in the applications marketplace.
Oracle made anjust days after PeopleSoft itself had announced plans to
Both PeopleSoft and Oracle make software used by corporations to handle back-office tasks in areas such as human resources, and both compete with German software maker SAP, which holds the No. 1 position in that marketplace. Oracle has said it would not continue to market PeopleSoft's products if the deal succeeds, leading analysts and other industry observers to describe the bid as an attempt to drive a rival out of business, even if the sale doesn't go through.
PeopleSoft CEO Craig Conway said during a conference call with media and analysts Thursday afternoon that the takeover bid could backfire on Oracle, with customer uncertainty surrounding the deal undermining support for the database giant.
"The real beneficiary of this last week is more likely going to be IBM," Conway said. "They're the only significant competitor to Oracle in the database industry. The level of concern, frustration, outrage is so high that I think IBM has the opportunity to convert Oracle customers into IBM customers."
PeopleSoft's board of directors voted unanimously to recommend that stockholders reject the offer and reaffirmed its commitment to the J.D. Edwards deal. On Wednesday, PeopleSoftwith the Federal Trade Commission and the U.S. Department of Justice of its plans to acquire J.D. Edwards.
Beside concerns about valuation and Oracle's "predatory intentions," the board rejected the proposal because it felt that an Oracle acquisition would be unlikely to pass the scrutiny of federal antitrust regulators, PeopleSoft Chief Financial Officer Kevin Parker said during the conference call.
"The enterprise software market without PeopelSoft present would only be down to two competitors--SAP and Oracle," he said. "Our advisers were very familiar with how the FTC would look at a market."
Oracle continued to tout the proposal as a win for PeopleSoft investors. "Oracle is disappointed that PeopleSoft's board has put the self-interest of management over the best interests of PeopleSoft shareholders," said Jim Finn, an Oracle spokesman. "In public statements, Mr. Conway has already unilaterally rejected Oracle's offer to acquire PeopleSoft--at any price and under any circumstances--even before the PeopleSoft board had met to consider it. PeopleSoft's board has also refused repeated requests to meet with Oracle to discuss our offer, and they have refused to redeem the company's poison pill."
Conway said during the call that PeopleSoft customers have been uniformly opposed to the Oracle bid. "There's been a consistent reaction from our customers," he said. "It's been surprise, and in a lot of cases, indignation...The most common response is, 'What can I do to help?'
"I think it's important to take advantage of the unanimous goodwill of our customers to minimize disruptions, and that's what we're doing," Conway added. "We have 8,000 people in this company, whose single-minded purpose now is to ensure there's minimal disruption of business."
Some investment bankers question the sincerity of Oracle's buyout intent. "Since Oracle didn't go to management and the board first--before publicly announcing their offer--how real can (Ellison's) interest be?" asked one investment banker.
Oracle first publicly announced its tender offer and then later faxed its offer to PeopleSoft's board of directors, a PeopleSoft representative said. Before sending the fax, Oracle had not held discussions about buying the company with PeopleSoft's management or board, the representative added.
The two companies held talks a year ago concerning PeopleSoft buying Oracle's business applications business, and no further discussions have occurred since then, the representative said.
Poison pill hard to swallow
With PeopleSoft rejecting its takeover bid, Oracle is faced with either raising its offer in a friendly deal or seeking legal action to remove PeopleSoft's --a provision that calls for more shares to be unleashed, thereby making it more expensive for an unwanted suitor to acquire the company.
The poison pill, for example, will prevent Oracle from submitting PeopleSoft's shares, even if 100 percent of PeopleSoft investors
The uproar won't end soon. Customers
of Oracle, PeopleSoft and J.D. Edwards
should look at outsourcing options and
safe bets such as Microsoft and SAP.
As of Wednesday, Oracle had not filed any lawsuits seeking to remove the poison pill, said Oracle spokeswoman Jennifer Glass. She said the software maker is determined to meet with PeopleSoft's directors to discuss Oracle's offer. Oracle was not immediately available for comment on the formal rejection of its bid.
Proxy solicitors say companies have tried to take legal action to remove poison pills in the past, but with little to no success.
"What I have seen is litigation (that has been) filed, but I have not seen anything that has been successful in that regard," said Tom Ball, senior managing director with Morrow & Co., a New York-based proxy solicitor.
He added that, if a hostile buyer has collected more than 50 percent of the outstanding shares, it will try to use the tendered shares to pressure the board to remove the poison pill.
"Often you will hear the company say, 'The shareholders have spoken,'" Ball said. "But I've never seen a target company remove a poison pill just because of a show of support from a tender offer."
Oracle's tender offer is set to expire July 7, but companies will often extend deadlines if they encounter difficulty collecting enough tendered shares.
The other option is for Oracle to raise its buyout offer. Currently, Oracle's $16 a share cash offer is below PeopleSoft's trading price of $17.37 at the close of Thursday trading.
One portfolio manager said Ellison needs to up his buyout offer before his firm would consider tendering its shares.
"I think Larry has to pay well into the $20s before we'd consider a PeopleSoft and Oracle merger," said Eli Salzman, a portfolio manager with Lord Abbett, a New York-based money management company. Lord Abbett held a 1.73 percent stake in PeopleSoft as of March 31.