Oracle Faces Tough Work After PeopleSoft Takeover

Most corporate mergers encounter turbulence, but Oracle's shotgun marriage with PeopleSoft promises to be especially stormy as the deep-rooted enmity between the two longtime rivals compounds the difficulties that typically arise when different software products are cobbled together.

"The whole thing has been like watching two porcupines mate," said Christopher Lochhead, chief marketing officer for Mercury Interactive, a San Jose, Calif., software maker. "Oracle is going to have to bring the same tenacity to making the deal work as they did to getting the deal done."

To make matters even more dicey for Oracle, the company must try to win over thousands of PeopleSoft customers that rallied against the takeover attempt almost as soon the saga began 18 months ago.

"I don't think any of the uncertainty and anxiety has gone away for the customers," said Dion DeLoof, president of the Anteo Group, an Atlanta-based software consultant that works with 35 of PeopleSoft's major customers. "There are a lot of people out there that don't want to be beholden to Oracle."

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Oracle CEO Larry Ellison seems unfazed by the challenges ahead. "We already have a clear plan of what we are going to do," he said during an interview after Oracle announced its conquest of PeopleSoft.

Ellison's strategy envisions virtually all of PeopleSoft's customers remaining on board after the acquisition, giving Oracle the opportunity to sell them a variety of other software products while it collects a steady flow of revenue for maintaining and upgrading existing products. Oracle is so confident its strategy will pan out that it has already assured investors the PeopleSoft will boost the company's profit by about $400 million during the fiscal year ending in May 2006.

Yet some surprises seem inevitable. Because of the hostilities underlying the deal, Oracle did not get an insider's view of PeopleSoft until this past weekend when the takeover target finally opened its books for the first time.

"Oracle is coming in with an unusual amount of ignorance about something that just cost them $10.3 billion," said Joshua Greenbaum, a business software consultant who has followed Oracle and PeopleSoft for years.

University of Southern California corporate law professor Ehud Kamar agreed, describing the Oracle takeover as "a deal that looks particularly susceptible to integration difficulties."

To ease the transition, Oracle hopes to retain the brightest engineers among PeopleSoft's 11,500 employees. At the same time, though, Oracle plans to fire thousands of other workers to cut expenses -- a process that threatens to open even more emotional wounds among PeopleSoft workers who skewered Ellison and his lieutenants during the takeover saga.

Ellison already is trying to patch things up. After Oracle announced the deal had been cinched, Ellison sent an e-mail to PeopleSoft's employees to reassure them that they will be treated fairly under his reign.

"One of the biggest risks for Oracle is whether it will be able to retain enough of the right people," said Meta Group analyst David Yockelson.

Silicon Valley's soft labor market should help Oracle by giving alienated PeopleSoft engineers less incentive to leave. PeopleSoft's October firing of its former CEO Craig Conway -- a vitriolic critic of Oracle -- also might have helped cool the tensions during the past two months, Kamar said.

Still, keeping PeopleSoft customers happy might prove even more difficult for Oracle.

PeopleSoft's customers have a huge stake in how the deal progresses because they already have sunk millions of dollars into sophisticated software applications that run everything from their accounting to personnel departments.

"You are talking about big, complex software that's difficult to implement potentially becoming even bigger and more complex," said Michael Lodato, executive vice president for QAD Inc., a smaller software maker in Santa Barbara. "I don't think you will see any of the customers jump ship in the short term, but two or three years down the road they may start spending their money on something else."

Ellison seems to welcome the skepticism about a merger that many analysts predicted would never be consummated. "The conventional wisdom has been wrong consistently in analyzing this deal."

In trading Tuesday, Oracle shares slipped 40 cents, or 2.7 percent, to close at $14.23 on the Nasdaq Stock Market, near the top of its 52-week trading range of $9.78 to $15.51. PeopleSoft shares edged up 1 cent to $26.43 on the Nasdaq -- a penny short of their 52-week high.

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