Oracle comes out fighting with revenue recognition allegations against PeopleSoft

Oracle came out fighting on Monday to assure the markets that it is still determined to acquire PeopleSoft, but ramped up the stakes by alleging that its target may have improperly booked revenue during its latest quarter.

"We remain committed to acquiring PeopleSoft," Oracle executive vice president Charles Phillips. “There's no merit to the proposition that the deal is dead. Ironically, the people who are saying that have no say in the matter. This deal is in the hands of shareholders and the transaction has been progressing as expected."

But Phillips did suggest that this determination does not come at any price. The deal on the table at the moment is worth around $7.5 billion, up from an initial bid of $5.1 billion. "We won't pay any unreasonable price just to claim victory," he said, but declined to say what he would regard as unreasonable.

In a bold move, Oracle’s chief financial officer Jeff Henley suggested that PeopleSoft in the third quarter may have improperly booked about $156 million in revenue tied to a controversial provision in a customer assurance program that PeopleSoft is using as a "poison pill" defence against any hostile takeover.

PeopleSoft says that the Customer Assurance Program is designed to protect customers from product obsolescence in the event that it is acquired. The plan promises refunds of between two and five times the cost of licence fees if PeopleSoft is acquired within two years and the buyer makes changes to products and product support within four years.

According to Oracle, revenue has been booked during the third quarter as the programme included a clause that would have triggered the refunds in the event of a change in the control of PeopleSoft's board. But at least $156 million of the refunds are so easy to trigger that PeopleSoft shouldn't have booked the third quarter revenue connected to those rebate offers, alleges Oracle.

“From what we've read, at least, we believe they have a revenue recognition problem," Henley said. "It seems to us and the accountants we have spoken to that their software licence transactions don't meet accounting standards since PeopleSoft may be required to refund two to five times the revenue...if any of the contracts say-and we have seen the contracts-what the SEC filing says, then we think there may be a significant amount of revenue that shouldn't have been realised.”

He added that despite PeopleSoft’s claims, he did not see that the company was performing well financially. "It's puzzling to me that anyone could say that PeopleSoft is doing well unless you are comparing apples to oranges,” he said. “Seven quarters of losses is not productive."

In October PeopleSoft recorded a third-quarter net loss of $7.3 million compared with net income of $44.6 million in the comparable year-ago quarter. The loss was blamed on PeopleSoft’s merger with JD Edwards.

A PeopleSoft spokesman said : "We're confident that the revenue related to these contracts is recognised appropriately. It is tied to our customer assurance program. We have said all along, and will continue to say, that it is in the best interest of our customers and our shareholders. We have said since June that it is a prudent response to Oracle's continued attempts to disrupt our business."

PeopleSoft has estimated that potential liabilities related to the refund program totaled $807 million as of 30th September. Wall Street firm JMP Securities estimates that the liabilities could top the $1.35 billion mark by the end of Decmember, which in turn could lower PeopleSoft’s takeover value by as much $3.79 per share.

Meanwhile Oracle’s executive vice president Safra Catz confirmed that Oracle hopes to use PeopleSoft’s AGM to overthrow the existing board of directors which has consistently rejected Oracle’s offer. This is not likely to occur until May, but nominations for the board must be made 120 days prior to the meeting. This is a result of a recent change in the corporate by-laws of PeopleSoft which previously only required a 20 day nomination window.

Only four of PeopleSoft's eight directors will be up for re-election, meaning Oracle can't win majority control of the board even if all its nominated directors win the proxy fight. But Catz said: “We will have an alternate slate up for the proxy battle. There are a number of different things that could happen then... too many to try and predict an outcome."

Because of the need to submit nominations so early, this is likely to occur before both companies hear the outcome of the regulatary reviews of the proposed takeover by the European Union and the US Justice Department. But Catz insisted that Oracle was confident of winning approval to proceed. "We expect to certify substantial compliance with the [US] Department of Justice within the next few weeks and then make our affirmative case with them, a compelling description of why this is pro-competitive," she said, adding that the process with the EU should occur in a 120-day window, she noted. "One-hundred and twenty days is the outside date. We hope to conclude that process more quickly.

"We spent the last five months compiling our information and believe the case will be well received by the DOJ," Catz said. "We have been very clear with regulators that this is not the telecommunications industry that they are used to reviewing. This is an e-commerce business and in the end there can be little doubt that this will help us compete against SAP and the combination of Oracle and PeopleSoft will put us into the number two position as well as taking on companies such as Lawson, Sage, IBM and new entries such as Microsoft."

Phillips concluded by arguing that while the takeover has seemed protracted, in reality it was always likely to take this long. "We expected this to take time," he said. "The passage of time doesn't affect us in any way; it factored in our thinking. In fact, time is on our side."