Probe Into Oracle's State Contract Another Blow For Company

IBM ended 2001 with a 34.6 percent share of the $8.8 billion database market, toppling Redwood Shores, Calif.-based Oracle from its longtime leadership position, according to Gartner, an industry researcher.

Oracle's market share at the end of 2001 stood at 32 percent, down from 34 percent in the prior year, according to Gartner's report, released Monday.

Bolstered by a $1 billion acquisition of Informix's database business, IBM's market share surged from 30.3 percent at the end of 2000. Microsoft, the only software company larger than Oracle, also made inroads in the database market, lifting its market share from 14 percent in 2000 to 16.3 percent at the end of 2001, Gartner says.

Oracle described Gartner's findings as misleading because the numbers include sales of software made for mainframe computers, a market of little interest to Oracle.

"We believe we are the leaders where the action is, says Oracle CFO Jeffrey Henley. "We haven't seen anything to indicate our customers are less loyal."

The stiffer competition, driven by a price war, has added to Oracle's miseries.

Already bruised by a brutal high-tech slump, Oracle is nursing a wounded stock while California politicians poke around another sore spot--a $95 million database deal reached with the state government last year

A state auditor recently criticized the deal as a waste of state money, triggering a chain of events that has led to allegations of document shredding and influence peddling.

Just how much backlash to the deal hurts Oracle probably won't be settled until state Attorney General Bill Lockyer and the Legislature complete an investigation into the circumstances leading up to the contract, analysts say.

"It's not a catastrophic event, but when you are already operating in a difficult environment the last thing you need is more difficulty," says industry analyst Mark Verbeck of ThinkEquity Partners.

Lockyer and lawmakers are looking into whether a $25,000 political contribution made by Oracle to Gov. Gray Davis's campaign influenced his administration's decision to buy the database software.

Denying any misconduct, Henley says Oracle is unfairly being "dragged through the gutter." Oracle was part of a high-tech consortium of 30 companies that agreed in March 2001 to contribute $25,000 apiece to Davis' campaign, Henley says.

"This deal is being misconstrued and misunderstood but with an aggressive campaign we will overcome it because the facts are on our side," he says.

Oracle has offered to cancel the six-year contract and Davis has said he wants out of the contract.

Refunding the money is something Oracle easily can afford. The $95 million contract represented less than 1 percent of the company's $10.9 billion in revenue during its fiscal year ending in May 2001--the period when the state signed the deal.

Although it won't specify how much it stands to collect from the contract, Oracle says it isn't in line to receive the full $95 million because a substantial portion is due Logicon, the state's adviser in the deal.

Oracle probably is most concerned with how the furor will affect its past and future sales to government agencies, a key market for the company, says Sam Singer, a San Francisco-based public relations representative specializing in corporate crisis management.

"It's far too soon to tell who is at fault here, but no company with a good reputation wants to be involved in a growing government scandal like this," Singer says.

Some analysts say the probe isn't likely to become a significant issue for investors.

"I'm sure this is real interesting in California, but it doesn't seem anything close to an Enron situation to those of us outside California," says industry analyst Robert Tholemeier of Wells Fargo Securities in Punta Gorda, Fla.

The challenges already facing Oracle have spooked investors. The company's shares fell for the fifth consecutive session Monday on the Nasdaq, shedding 21 cents to close at $8.22. During the past week, the stock has traded for a little as $7.84 per share, its lowest level since the summer of 1999.

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