Oracle spanner in PeopleSoft''s works

Related items PeopleSoft's past acquisitions What analysts are saying Ellison seeks meeting with PeopleSoft board Oracle bid FAQs

Mumbai: The $5.1-billion hostile bid for PeopleSoft by rival Oracle on 6 June 2003 has added to the confusion in the enterprise applications market. Analysts do not believe the bid will succeed, but they expect it to disrupt PeopleSoft's plans.

PeopleSoft, which has gained market share from Oracle in recent years, had upped the ante by announcing, on 2 June, a $1.7-billion all-stock acquisition of JD Edwards. This would take the company, no newcomer to the acquisitions game, past Oracle to the second rank in the enterprise applications arena. (Click here to see list of PeopleSoft acquisitions.)

It would have been surprising if Oracle's chairman and chief executive officer Lawrence J Ellison, had passively watched from the sidelines as JD Edwards got taken over. His company was about to be shunted down the rankings.

The 3 June announcement by Invensys of its decision to sell former market leader Baan to an investment group consisting of Cerberus Capital Management and General Atlantic Partners, two of the world's leading private investment firms, for $135 million, had added further piquancy to the situation. The investment group will merge Baan with SSA Global Technologies, which it also owns, adding muscle to yet another Oracle rival.

The enterprise resource planning, or ERP, business has been impacted by business as well as technology changes in the past few years. So the market has been anticipating aggressive moves by the leading players. Yet the announcement of three major deals announced in one eventful week has thrown everybody into a tizzy.

"Atrocious" validation
The euphoria generated at PeopleSoft by the JD Edwards deal didn't last long. Craig Conway, PeopleSoft's president and CEO, had issued a statement on 2 June saying, "The combination of J.D. Edwards and PeopleSoft is a winning one for customers. Both mid-sized and large enterprise customers will have access to the broadest suite of integrated enterprise software applications in the world. We are excited and confident about what this acquisition will mean for our customers and the enterprise software industry."

The PeopleSoft-JD Edwards combine would become the world's second-largest enterprise applications software company, after SAP. It would have combined annual revenues of $2.8 billion. It would have 13,000 employees, and over 11,000 customers in 150 countries.

Ironically, just a few days later, Conway had this to say about the Oracle bid: "If anyone needed any further validation of the strength of the JD Edwards acquisition, we heard it today from Oracle."

It was hardly a compliment Conway would cherish. He called Ellison's bid "atrociously bad behaviour from a company with a history of atrociously bad behaviour. Obviously it is a transparent attempt to disrupt the acquisition of J.D. Edwards by PeopleSoft announced earlier this week."

Uncertain
The immediate reaction from PeopleSoft has been to advise shareholders to refrain from immediate action. But the law requires PeopleSoft and its board of directors to review all cash tenders regardless of intent, and to provide a definitive recommendation to shareholders.

Larry Ellison has already written to Conway seeking a meeting with the PeopleSoft board to discuss the merits of the offer (see text of letter). PeopleSoft shareholders have 20 business days from 9 June 2003 to make up their minds on whether to sell to Oracle.

The 87-page Oracle offer is conditional on PeopleSoft redeeming or modifying the poison pill that protects the current management from hostile takeovers. Given this poison pill, Ellison is unlikely to succeed unless Conway acquiesces. (Click here to see Oracle's FAQs on the bid.)

PeopleSoft needs to get its act together quickly. While some analysts see the Oracle offer of $16 per share as being far too low to work, it has thrown a spanner in PeopleSoft's works. The JD Edwards acquisition has come into doubt, and a question mark has arisen over PeopleSoft's future.

There is an interesting possibility suggested by some analysts. That is for PeopleSoft to convert its all-stock offer to JD Edwards into an all-cash offer. Since such an offer will remove $1.7 billion of cash from its kitty, PeopleSoft will become that much less attractive to Oracle's shareholders. Oracle, which has cash reserves of $5 billion, and has announced that it will take a line of credit from Credit Suisse First Boston, could find itself a bit stretched if that happens. On the other hand, if Oracle doesn't go for it, PeopleSoft's cash reserves will be poorer by $1.7 billion, which will reduce its scope to manoeuvre in the intensively competitive marketplace for enterprise applications.

Uncertainty for customers
Ellison has said that if he succeeds in taking over PeopleSoft, he will not seek new customers for PeopleSoft products. Instead, he will try to persuade PeopleSoft customers to switch to the Oracle E-Business Suite.

This means that Oracle will gain PeopleSoft customers and products at a low price. However, the acquisition of customers may not be easy. The uncertainty created by the bid may persuade many customers to switch either to market leader SAP, or to smaller, more focused and best-of-breed vendors in areas like customer relationship management and supply chain management. 

Several analysts have described the Oracle bid as an attempt to torpedo the JD Edwards deal, and disrupt PeopleSoft's plans in the short and middle term. He is likely to succeed in doing that, irrespective of whether he manages to swing the PeopleSoft deal.