Judge OKs Oracle's Hot PeopleSoft Pursuit

U.S. District Court Judge Vaughn Walker ruled that the U.S. Department of Justice did not prove its assertion that a unified Oracle and PeopleSoft would so concentrate the enterprise-applications market that customers will suffer negative consequences, such as increased prices and reduced choice. Among other findings, Judge Walker rejected the DoJ's contention that an Oracle/PeopleSoft merger reduces the market to just two players: Oracle and market-leading SAP. Instead, he ruled that other vendors, including Microsoft, are capable of competing in the enterprise-apps space. He also dismissed the DoJ's prediction that a two-player market of Oracle and SAP would lead to coordinated actions around pricing.

"Plaintiffs have not proved that the ERP products of numerous other vendors, including Lawson, AMS and Microsoft, do not compete with the ERP products of Oracle, PeopleSoft and SAP, and that these other vendors would not constrain a small but significant nontransitory increase in price by a post-merger Oracle," writes Judge Walker in his ruling.

Oracle wasted no time making clear it will move full steam ahead in its appeal to PeopleSoft shareholders, immediately posting a statement on its Web site from Oracle chairman Jeff Henley. "This decision puts the onus squarely on the board of PeopleSoft to meet with us and to redeem their poison pill so that the shareholders can accept our offer," said Henley.

The company also shipped a letter signed by Henley and Oracle CEO and founder Larry Ellison to the PeopleSoft board of directors, urging them to reconsider their previous recommendation to reject the takeover offer. The current offer on the table is $21 per share or $7.7 billion. PeopleSoft's stock price, currently at $19.83, rose by nearly $2 after the decision was announced.

In response, PeopleSoft officials said this week that the board will study the implications of Judge Walker's ruling, but they also reiterated the company's historically consistent position against the takeover and the roller-coaster ride of offers that Oracle has put into play. The company still has its poison pill in place to protect shareholders and the contentious matter of its Customer Assurance Plan, which, in the event of a takeover, will guarantee existing customers two to five times their license revenues in the form of rebates. This would have to be paid by Oracle, and the total liability at this point is more than $2 billion.

The protracted tussle, which began more than a year ago when Oracle first disclosed its predatory plan, certainly has taken a toll on PeopleSoft in the form of sagging new license sales and difficulty winning new customers. This week's ruling only hurts them more.

"It's a major setback, though I would not underestimate their resolve to keep [the takeover] from happening," says Paul Hamerman, vice president at Forrester Research. "But this is going to hurt their license sales, making it tougher and tougher to sign deals, especially this year."

How long can PeopleSoft hold out? With $2 billion in cash and a solid stream of recurring maintenance revenue from existing customers, the company should be able to dig its heels in for quite awhile. But without question, Oracle's quest is wearing on the firm. Frankly, it isn't helping Oracle's sales either, according to Hamerman, while SAP, whose sales are way up, is able to sit on the sidelines and reap the rewards.

As for partners, the situation has both pros and cons. The negatives are obvious in terms of the reduction in license sales and implementation projects. But on the upside, solution providers can find opportunity in the uncertainty around PeopleSoft's fate. One example are solution providers that offer independent software maintenance and support to existing PeopleSoft customers, who have been hit with rising maintenance costs since the takeover talks took off.

Tomorrow Now is one such company. The Texas-based firm, which positions itself as an less-expensive alternative to PeopleSoft for product support and maintenance services, is reaping the benefits of the Oracle/PeopleSoft struggle in the form of customers wanting a new option.

"We see the [judge's ruling] as good news for us because we are positioned to benefit," says Andrew Nelson, CEO of Tomorrow Now. "Either way, we benefit. If Oracle fails, I still think that PeopleSoft is very wounded, and customers are afraid of whether it will survive in the long term. Given that, we see more customers turning to us to protect their investment."

There's no reason to believe that the situation will be resolved anytime soon, either. This week's ruling is sure to be appealed by the DoJ, while the deal itself still faces the scrutiny of the European Union. Lastly, PeopleSoft has fired off a civil lawsuit against Oracle, charging unfair business practices, that is due to go to trial in November.

"A lot of these things are going to play out between now and the end of the year," Hamerman says.

Let's hope so.