Target: PeopleSoft

Last Monday, PeopleSoft said it planned to buy J.D. Edwards,and bigger midmarket mind share,in a $1.7 billion stock deal. Theoretically, that buyout would make PeopleSoft the second-largest business software maker in the world after SAP.

By Friday, that friendly pact was pre-empted by Oracle's surprise, and unsolicited, $5.1 billion cash bid for PeopleSoft. Craig Conway, PeopleSoft CEO, in a statement labeled that offer "atrociously bad behavior from a company with a history of atrociously bad behavior." Conway went on to add: "Obviously, this is a transparent attempt to disrupt the acquisition of J.D. Edwards by PeopleSoft."

At press time, PeopleSoft's board was reviewing the offer, as required by law, and advised shareholders to take no immediate action.

Solution providers, meanwhile, reacted to last week's series of events with a mixture of concern and resignation.

"I think it's pretty simple: [Oracle Chairman and CEO] Larry Ellison can't sell [business] software, and everybody in the industry knows that," said Chris Gloede, vice president of business development at Capita Technologies, a King of Prussia, Pa., solution provider.

"It comes down to the fact that Ellison will not be one-upped by anybody. He can fend off becoming No. 3, which I don't think he can stomach."

Whatever the outcome,and the deal is by no means done,it raises questions.

"J.D. Edwards and PeopleSoft channel partners are completely in limbo," said Marc Maselli, president of Back Bay Technologies, a Boston solution provider.

On Friday, Oracle CFO Jeff Henley maintained that the PeopleSoft buyout could be sealed by July and that Oracle would then consider whether to go forward with the J.D. Edwards buyout.

Ellison maintained that his proposal, to submerge PeopleSoft's applications in Oracle's own apps business, makes more sense than PeopleSoft's previous plan.

"We can combine our HR team with their HR team to come up with a much better HR product," he told analysts. He insisted that overlaps between the product lines provide huge savings opportunities. "This consolidation ... allows us on the one hand to save money, and on the other hand to make some vast product improvements to make us a much stronger player in the market. That is in contrast with [PeopleSoft's] current plan, which is to enter a lot of new markets, a lot of markets that they are not in," Ellison said.

Oracle's earlier statement left no doubt as to who would be on top of the applications business. Oracle will "not be actively selling PeopleSoft products to new customers" but will be incorporating "advanced features from PeopleSoft's products into future versions of Oracle's eBusiness Suite."

"This isn't a takeover; it's a hostage taking," said Jeff Matthews, general partner of RAM Partners.

Many observers said Oracle isn't dealing from a position of strength. Its perch atop the database heap is under siege by Microsoft and IBM, and Oracle has yet to prove itself in business applications. Last quarter, the company earned 26 percent of its revenue from applications. The perception is that Oracle applications are riding the shrinking coattails of its database business.

There are a few trends at work here. First, as the enterprise IT spending doldrums continue, Siebel Systems, SAP, PeopleSoft and Oracle,all with enterprise pedigrees,are trying to get traction in the midmarket with varying degrees of success.

Second, while SAP remains the enterprise application leader, most of the players, SAP included, have one eye on Microsoft. The software behemoth has bought more than $2 billion worth of midmarket business software companies in the past few years and pledges continued investment. While Microsoft repeatedly stresses that it is targeting smaller companies, no one doubts it will move upmarket when the time is right and hit these other companies where it hurts.

"In the short term, SAP is the one to beat. Long term, it's Microsoft, [which has] all the time in the world [to attack enterprise apps] and can sit back while the rest of the software players self-destruct," said Laurie Orlov, research director at Forrester Research.

Solution providers agree that Microsoft is the likely end game here. "PeopleSoft has the Internet functionality [to] help Oracle compete against Microsoft.

Microsoft has taken on Oracle, and this is Oracle's response," said Chris Cangero, vice president at Epoch Data, a Microsoft partner in New York.

Microsoft CEO Steve Ballmer declined comment on the proposed deal.

Meanwhile, SAP, PeopleSoft, Siebel and the rest of the enterprise gang are trying to move downmarket to smaller companies, where they will run headlong not only into Microsoft Business Solutions but Best Software. Best, with its Act, SalesLogix and other offerings, has millions of users.

There just isn't enough business for everyone, and all of the players acknowledge that the race is on to consolidate.

"The competitive landscape is changing every day," said Ron Verni, Best's CEO, speaking last week prior to the Oracle news. His company has spent $1.2 billion in the past five years on acquisitions to enhance its own lineup and has plans in the works for more. "Quite frankly, what is happening in the entire segment is everybody has to be able to get bigger faster," said Verni.

Should Oracle succeed, there could be huge ramifications. PeopleSoft has tight ties with IBM, and even Microsoft, on the database front, although the bulk of its applications still run on Oracle. Just last month, PeopleSoft and IBM announced a joint Linux push that could also come into play.

One PeopleSoft partner is hopeful, albeit shell-shocked, by the Oracle move. "We were excited about the [J.D. Edwards] news earlier in the week," said Joe Nicholson, president of Surebridge, a midmarket applications outsourcer based in Lexington, Mass. "The focus here was the midmarket, as is our focus. [The Oracle proposal] is surprising. We work extensively with Oracle database products [as well], and we look forward to extending that relationship with Oracle."

STEVEN BURKE, SCOTT CAMPBELL, BARBARA DARROW, JOSEPH F. KOVAR, MARIE LINGBLOM, TIMOTHY LONG, JEFF O'HEIR, AMY ROGERS NAZAROV & PAULA ROONEY contributed to this story.