Oracle Offers to Buy PeopleSoft for $5.1 Billion

In a hostile takeover bid that could reverberate across the software industry, database giant Oracle offered to purchase all outstanding shares of enterprise application company PeopleSoft for $5.1 billion in cash.The bid comes just days after PeopleSoft moved to acquire mid-market applications provider J.D. Edwards in a $1.7 billion stock bid. It also follows Invensys’ sale to software company Baan to a group of investors, in another sign of how rapidly the software market is consolidating.On Friday morning, Oracle said it offered $16 per share for the company as part of its announcement that it would meet or exceed consensus earnings estimates for the fiscal fourth quarter. This was a 6 percent premium on PeopleSoft’s shares at the market’s opening.

But in a statement late Friday afternoon, PeopleSoft’s President and CEO Craig Conway blasted the offer, calling it “atrociously bad behavior from a company with a history of atrociously bad behavior. Obviously it is a transparent attempt to disrupt the acquisition of J.D. Edwards by PeopleSoft announced earlier this week,” the statement said.

Jeff Henley, Oracle Executive Vice President and CFO, said on a conference call Friday morning that Oracle would not actively sell PeopleSoft software to new customers, but will instead opt to bundle features from PeopleSoft products into future versions of the Oracle eBusiness Suite, as well as support all PeopleSoft products.

Henley said there would be “minimal business integration risk since we will not be integrating the product line. Though we will not be actively seling PeopleSoft products to new customers, we will provide enhanced support for all PeopleSoft products. PeopleSoft customers will benefit from having access to a migration path that will be optimized for moving to a broader and more fully integrated e-business suite. They will also be offered, at no extra license charge, a product migration to the equivalent Oracle product. In addition, we plan to extend the support for the older PeopleSoft version 7 beyond the December 2003 deadline that PeopleSoft had announced, thus removing pressure on PeopleSoft customers to upgrade.”

Henley said PeopleSoft developers will focus on incorporating advanced features from the PeopleSoft products into the Oracle eBusiness suite as well as creating migration scripts for easier upgrades to the e-business suite.

But in its response to Oracle, PeopleSoft said the bid was only designed to disrupt a company that has gained marketshare against Oracle in the past few years, and complicate PeopleSoft’s intent to acquire J.D. Edwards, which also provides mid-market enterprise applications.

“If anyone needed any further validation of the strength of the J.D. Edwards acquisition, we heard it today from Oracle,” Conway said in his statement.

The shape of things

It is clear that PeopleSoft’s bid on Monday to buy mid-market applications provider J.D. Edwards for $1.7 billion in stock woke Oracle up. That deal, if approved, could givePeopleSoft considerable heft over its rivals Oracle and Siebel.But if Oracle succeeds in its bid for PeopleSoft, it may very well turn its attention to J.D. Edwards, a move Ellison hinted on a conference call Friday was possible. “We are certainly keeping our options open,” he said.

Jon Derome, program manager of the Business Applications & Commerce unit at the Yankee Group, said if Oracle were to succeed in buying both PeopleSoft and J.D. Edwards, it would create a definitive No. 2 player in the business applications market to Germany’s SAP.

While Derome said SAP would still be the market leader, it would make Oracle a more formidable foe. It would also leave another top-tier vendor — Siebel — in a “very awkward place.”

“This seems to be a gamesmanship play,” Derome told internetnews.com. He called it “a way of throwing cold water on [PeopleSoft’s] J.D. Edwards acquisition. But if Oracle is paying a premium, what sort of synergies do they hope to achieve?”

Paul Hamerman, director at Forrester Research, was more critical of the deal. “This seems to be an attempt to take a key rival out of play, or at least to disrupt the pending merger between PeopleSoft and J.D. Edwards,” Hamerman told internetnews.com.

“This does not appear to be a good thing for PeopleSoft customers — most will not want to move to Oracle’s applications. The business justification and the overall deal appear to be shaky at best.”

Hamerman called the deal a shame. “Oracle and PeopleSoft don’t like each other — they’re archrivals. I see this as being very disruptive and unfavorable to PeopleSoft. There will be attrition of employees, both voluntary and involuntary.”

Hamerman also said the deal would cast a pall over the J.D. Edwards bid by PeopleSoft.

“There is a formal merger agreement between PeopleSoft and J.D. Edwards and this deal [Oracle buying PeopleSoft] would seem to void the J.D. Edwards deal if it is completed,” he said.

Oracle CEO and Chairman Larry Ellison, who also attended the call, said that he and his management team looked at the PeopleSoft bid for J.D. Edwards and decided to “make an offer that is better for PeopleSoft shareholders.”

“Based on performance of PeopleSoft in the market, which has experienced rapid declines in licensed revenue, we think they proposed a risky merger with J.D. Edwards, with minimum savings. Our alternative is a safer road. Shareholders can take that $16 and go out and invest in the combined company,” he said Friday.

In that respect, Ellison painted the play as good for all parties involved. But some analysts think it is just a way to kill a competitive deal that Oracle may perceive as a threat. After all, they said, if PeopleSoft succeeded in buying J.D. Edwards, which is widely acknowledged as having the best enterprise resource planning customer base available, it would virtually leave “table scraps” of customers on the table for Oracle, SAP, and Microsoft. Hamerman said that, boiled down, Oracle could end up killing the PeopleSoft product.

“They’re going to migrate PeopleSoft customers to Oracle products and take functionality from PeopleSoft and move it to Oracle. There is no long term development path for PeopleSoft products.”

Looking back and looking forward

Ellison said the deal is not so out of place as the public would think, revealing that PeopleSoft’s Conway approached him last year about merging both PeopleSoft’s and Oracle’s applications businesses. Though interested at the time, Ellison said he and Conway could not agree how such a deal would be structured.

“We continued to follow PeopleSoft very, very closely and we think the time is right again to present the [PeopleSoft] shareholders with an alternative plan, an alternative partnership than what management has proposed,” Ellison said. “We believe this offer for PeopleSoft shareholders presents superior value and lower risk alternative to their current options.”

Yankee Group’s Derome said he didn’t see how the move could be better for PeopleSoft shareholders, who might see their product snuffed out over time.

Ellison said he has offered to discuss his company’s plan with PeopleSoft’s board of directors. Oracle expects to commence the tender offer on Monday June 9 and Ellison said that if everything goes according to plan, Oracle could completely merge with PeopleSoft as early as July.

In related news, Oracle said it expects to report fiscal fourth quarter GAAP earnings per share of 14 to 15 cents. Oracle will provide more detail on its quarterly results on an earnings conference call on June 17.

PeopleSoft said its board of directors is required by law to review all cash tenders regardless of intent, and will provide a definitive recommendation to shareholders shortly thereafter. In the meantime, PeopleSoft said it is advising its shareholders to take no immediate action.