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Oracle Bid May Threaten IBM's Software Alliances
If Rival Buys PeopleSoft,
Big Blue Could Lose Sales
By WILLIAM M. BULKELEY
Staff Reporter of THE WALL STREET JOURNAL
What does the world's biggest computer company do when a major rival attacks two of its closest allies?
Oracle Corp.'s hostile takeover offer for PeopleSoft Corp. puts International Business Machines Corp. in that awkward -- and potentially treacherous -- position. IBM has been battling Oracle in the database business and last year surpassed it in a key segment. Meanwhile, it has forged tight alliances with PeopleSoft and with J.D. Edwards & Co., which has agreed to merge with PeopleSoft. Both companies, which sell so-called applications software, help push IBM's software, services and hardware along with their own products.
If Oracle buys PeopleSoft, the deal could disrupt hundreds of millions of dollars of revenue that IBM gets through those alliances. Worse, if the Oracle action starts a riptide of consolidation in the software industry, it could call into question IBM's carefully honed strategy of forming partnerships with more than 90 major application-software companies, including PeopleSoft and J.D. Edwards, after closing its own applications-software business.
Although some have suggested that IBM could jump into the fray as a white knight to buy PeopleSoft, Big Blue insiders privately dismiss that idea, saying IBM couldn't afford to alienate its other applications-software partners by acquiring a rival. Analysts agree that an IBM rescue of PeopleSoft isn't in the cards. "The chance of IBM making a bid for PeopleSoft is, if not zero, very close to it," said John Jones, an analyst with SoundView.
An IBM spokesman declined to comment.
Even so, Paul Deninger, chairman of Broadview Holding Co., a New York-based investment bank, said that a successful Oracle bid for PeopleSoft might force IBM to change its strategy. If the software industry consolidates into a few very large firms, he believes, IBM would have to acquire or build a big applications business of its own to keep its core database and Web-applications-server software businesses competitive.
Were IBM confronted by a combined Oracle and PeopleSoft, at least in the short term, analysts expect Big Blue would strengthen its relations with other partners, especially German applications software company SAP AG, a large PeopleSoft rival. SAP generates more than $1 billion of revenue annually for IBM, according to an IBM insider.
Bill Wohl, a U.S. spokesman for SAP, said SAP's ties to IBM would "certainly" get even tighter if PeopleSoft were to be acquired by Oracle.
IBM expects that its services business might even be boosted by an Oracle acquisition. Oracle has said it would focus on Oracle products and stop improving PeopleSoft's products, and IBM's consultants might gain business by helping PeopleSoft customers to update applications.
Some analysts view Oracle's bid to get bigger in applications software as a reaction to its shrinking share in its traditional database market, where it has been under fire from both IBM and Microsoft Corp. Last year, according to Gartner/Dataquest, IBM surpassed Oracle in the relational-database market for the first time, capturing 36% of the market, compared with 34% for Oracle and 18% for Microsoft.
In part, IBM's success in databases has been due to its $1 billion acquisition of Informix Corp. in 2001. IBM also has been gaining customers due to aggressive pricing.
In addition, IBM executives say their partnership strategy with PeopleSoft and others has been an important part of the database growth. To become an IBM partner, an applications firm typically must sign a contract guaranteeing that a certain percentage of their sales each year will be linked to IBM products, such as its database software. Many of the application vendors say they are more comfortable working with IBM than they are with Oracle, which competes with them in selling applications to customers.
Last year, software accounted for about 40% of IBM's earnings from operations and 16% of operating earnings, according to Laura Conigliaro, a Goldman Sachs analyst. |
