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Special Report: Oracle defiant as Justice Dept sides with PeopleSoft

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1st Mar 2004
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As expected, the Justice Department - backed by several US states - is filing a suit in a San Francisco court to prevent Oracle’s hostile takeover bid of PeopleSoft from proceeding.

It defended its action by arguing that such a takeover would damage the business software market that both firms operate in. Its complaint reads: "Oracle's proposed acquisition of PeopleSoft will substantially increase already high concentration among vendors that sell high function Human Resource Management (HRM) software and high function Financial Management Services (FMS) software purchased by organisations for use in the United States and abroad. More specifically, the proposed transaction will eliminate aggressive head-to-head competition between Oracle and PeopleSoft, in violation of Section 7 of the Clayton Act..."

The complaint - supported by the states of Maryland, Texas, Hawaii, Massachusetts, Minnesota, New York and North Dakota - also quoted from a 2002 report by Oracle co-President Chuck Phillips, then an analyst with Morgan Stanley, which stated: "The market is down to three viable suppliers who will help re-automate the back office business processes for global enterprises for years to come".

Oracle has confirmed that it plans to fight the decision. A spokesman said "The Department of Justice decision follows an aggressive lobbying campaign by PeopleSoft management. It is inconsistent with the overwhelming evidence of intense competition in the markets we serve and we believe it is without basis in fact or in law. A combined Oracle/Peoplesoft will significantly benefit all customers and shareholders involved".

But the decision has sparked two immediate developments. Firstly Oracle is withdrawing the nominees it put forward for election to PeopleSoft's board at the company's upcoming shareholder meeting, on the grounds that any appeal against the Justice Department will not be heard before the meeting on 25th March.

Oracle also extended, for the seventh time, the expiry date on its tender offer to PeopleSoft's shareholders. The $9.4bn offer will now expire on 25th June instead of the current 12th March expiry date.

So what happens now? "We expect Oracle to continue the battle for as long as it can" predicts Philip Carnelley, research director at Ovum. "After all, it costs little(compared to Oracle's profits) and is an effective way to antagonise and distract a key competitor. It has little to lose at this point.

"But the case has shown up Oracle's need to look for organic growth outside its current product range as it is selling into mature, static markets in both database and applications. It must know in its heart its chances of success are very slim indeed - it has to jump the regulatory hurdles in the US and Europe (the EU won't declare its opinion till May) and circumvent the poison pill issue".

As for PeopleSoft, Carnelly sees it facing its own challenges. "Oracle's argument for the takeover (and against PeopleSoft's tactics and attitude) is based on increased shareholder value - its own and its rivals" he notes. "PeopleSoft has had much adverse publicity on this score - especially its CEO's early declaration that he would not sell at any price. PeopleSoft's argument is largely about preserving the company for the sake of its customers and staff. The DoJ's decision too is based on customer impact. The two only come together if PeopleSoft can continue to build its business without Oracle and push its stock price above the $26 offered by Oracle. This doesn't look particularly likely right now - unless it embarks on the acquisition trail again. For this reason, it seems the arguments will run and run".

AMR Research takes a similar tack. "The odds against Oracle's success are even larger, but PeopleSoft customers and employees still can't fully relax" says Jim Shepherd, research director. "A federal antitrust lawsuit could drag on for months and prolong the uncertainty and animosity.

"PeopleSoft scored a victory with this DOJ decision, but it is now in the unenviable position of having to be a passive onlooker as Oracle and the DOJ debate the case in front of a federal district court judge. The DOJ has been joined in its suit by seven state attorneys general, which will likely slow and complicate the process while significantly raising the noise level. 

"It is almost inevitable that in an election year this kind of high-profile antitrust case will turn into political theatre. At some point, everyone from presidential candidates to local mayors will feel compelled to offer their opinion. It looks like it could be months or even years until this situation is fully resolved".

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