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Court Says Oracle Can Pursue Bid
For PeopleSoft in Antitrust Ruling
By DAVID BANK and DON CLARK
Staff Reporters of THE WALL STREET JOURNAL
September 10, 2004; Page A1
A federal judge cleared the way for Oracle Corp. to pursue its $7.7 billion hostile bid for rival PeopleSoft Inc., setting the stage for a complicated end-game in the 15-month takeover battle that has roiled the software industry.
In sweeping aside antitrust objections raised by the Justice Department, the 164-page ruling by Chief Judge Vaughn Walker of U.S. District Court in San Francisco could serve as a trigger for a long-anticipated consolidation in the $170 billion business software market. After Oracle set its sights on PeopleSoft in June 2003, rivals such as Microsoft Corp., SAP AG and International Business Machines Corp. considered mergers of their own.
Oracle still faces a number of hurdles before it can swallow PeopleSoft, including a possible antitrust challenge by European regulators. But the decision significantly increases pressure on PeopleSoft's board to reconsider Oracle's most recent offer of $21 a share, which it rejected in May. In after-hours trading after the decision was released, PeopleSoft's shares surged 14% to $20.41, as investors bet that the ruling would make a deal more likely.
Oracle pressed the point, as Chief Executive Larry Ellison and Chairman Jeffrey O. Henley asked in a letter to meet with the PeopleSoft board. "This decision puts the onus squarely on the board of PeopleSoft to meet with us" so that shareholders can consider Oracle's offer, Mr. Henley said in a statement. Oracle extended its tender offer, which had been due to expire today, until Sept. 24.
PeopleSoft said it will review the implications of the ruling. The board and CEO Craig Conway have relied heavily on antitrust objections in refusing to meet with Oracle executives to discuss a deal. In a statement, PeopleSoft noted that its board concluded in May that Oracle's offer undervalued the company.
Oracle, the No. 2 software company behind Microsoft by revenue, competes with PeopleSoft in the market for business applications software -- complex products that are used to automate operations such as finance, manufacturing and human resources. Combined, the two would be a more potent rival to Germany's SAP, though still have a smaller market share in the applications market. The Justice Department sued Oracle on grounds that it would reduce competition and could lead to higher prices for customers.
Judge Walker's decision, following a month-long trial earlier this summer, was a stinging -- and rare -- defeat for government antitrust regulators. He rejected the government's claim that the "large, complex enterprises" it said would be harmed by the merger were distinct from midsize companies that can choose among additional software suppliers. The government failed to prove that large businesses can turn to only three suppliers -- Oracle, PeopleSoft and SAP -- for business applications software, he found.
Rather, he said, other rivals, including Microsoft and technology-outsourcing firms, could constrain anticompetitive actions by Oracle. Oracle had argued that corporate software buyers have more choices than the government acknowledged, from niche vendors in specific industries to outsourced providers. And it introduced evidence intended to show that Microsoft, which supplies business applications to small and midsize companies, is targeting larger corporations as well.
"This was a battle about how to define the market," said Richard Gilbert, a former Justice Department economist who is chairman of the economics department at the University of California at Berkeley. He and other antitrust experts said the ruling could encourage additional mergers. "In this 164 pages, there's enough for a company that wants to fight the government to find something to cite," said Colin Underwood, an antitrust litigator with Proskauer Rose LLP in New York.
Judge Walker stayed his decision for 10 days to allow the Justice Department to consider an appeal. The department's antitrust chief, R. Hewitt Pate, said he was disappointed in the ruling and that the department "is considering its options." In a statement, he said the government believed that the merger "would result in a substantial lessening of competition" for business software.
The ruling vindicated Mr. Ellison's bold move for PeopleSoft, and his unusual decision to challenge a government antitrust case. Mr. Ellison has long advocated consolidation among software suppliers, arguing that too many companies are competing for slices of corporate technology spending that is unlikely to ever return to the super-charged levels of the late 1990s.
Marc Benioff, chief executive of Salesforce.com, and like Mr. Conway a former Oracle executive, said the takeover battle has been a matter of personal pride for Mr. Ellison, a billionaire world-class sailor. "To Larry, this is like the America's Cup -- he wants to win," Mr. Benioff said.
If PeopleSoft's board refuses to negotiate, Oracle will press its legal efforts to overturn PeopleSoft's "poison pill" antitakeover provision. A trial on that issue is scheduled to begin on Sept. 27 in Delaware's Court of Chancery.
In that case, Oracle will argue that PeopleSoft's board breached its fiduciary responsibilities to shareholders by refusing to consider Oracle's offers. Oracle also plans to challenge PeopleSoft's "customer assurance program," a series of money-back guarantees PeopleSoft has offered to customers that could be triggered if Oracle acquires PeopleSoft and reduces support for PeopleSoft products.
A third trial looms in state court in California, on PeopleSoft's claims that Oracle's bid and subsequent actions illegally interfered with PeopleSoft's business.
If PeopleSoft does negotiate, it will do so from a position of weakness. Oracle's bid, and the publicity from the antitrust trial, have hurt PeopleSoft's financial results. The company's second-quarter net income fell nearly 70%, and revenue fell short even of preliminary estimates PeopleSoft released in early July. The weaker sales allowed Oracle to pass PeopleSoft as the second-largest seller of business-application software, behind SAP. Oracle reported sales of new software licenses of $615 million for the 12 months ended May 31. PeopleSoft's new license sales fell to $606 million for the 12 months ended June 30.
Mr. Conway blamed disclosures from the trial that business software frequently is sold at steep discounts to its list price. "We had customers that were moving ahead armed with all of our discount forms," Mr. Conway told analysts on a conference call in July. "They were in a position to command or demand higher levels of discounts by sorting through and finding similar customers that got a higher discount than was being proposed."
PeopleSoft also warned that it would not meet its forecasts for the full year and that the uncertainties caused by the takeover battle made it impossible to forecast third- and fourth-quarter results.
Oracle had lowered its offer in May, to $21 a share from $26, to reflect PeopleSoft's weak results and sagging stock price.
Yesterday's ruling also could encourage PeopleSoft to seek a friendly "white knight," such as Microsoft, SAP or IBM. "Does somebody else come in?" asked Sam Jadallah, a venture capitalist at Mohr Davidow Ventures who previously worked at Microsoft. Spokesmen for Microsoft, SAP and IBM declined comment.
Beyond Oracle and PeopleSoft, the ruling could set off long-predicted broader consolidation in the software industry. The trial brought to light maneuverings by other tech giants in the wake of Oracle's bid. Microsoft engaged in months of discussions with SAP over a merger that at more than $60 billion would have been the biggest ever in software. IBM reconsidered -- but ultimately affirmed -- its strategy of staying out of the applications business in order to sell software "infrastructure" and consulting services for a variety of partners, and considered taking "blocking stakes" in applications-vendors to bind them closer to IBM.
In his testimony in the trial, Mr. Ellison cast Oracle's bid for PeopleSoft as a key part of the company's effort to bulk up for competition with the likes of Microsoft, IBM and SAP to become one of a handful of global suppliers of integrated "stacks" of software for large corporations and government agencies. In so doing, Oracle sought to transcend concerns of the Justice Department over the impact a takeover of PeopleSoft would have on competition in a narrower niche of the software market.
The takeover battle has taken a toll on Oracle as well. The company's shares are trading near a 52-week low after several analysts recently downgraded the stock, citing aggressive discounting, still-sluggish corporate technology spending and the distraction of the takeover effort. In 4 p.m. Nasdaq trading, Oracle shares closed at $9.93, up seven cents; they rose to $10.23 in after-hours trading following the court's ruling.
Amnon Landan, chairman and chief executive of Mercury Interactive Corp., a software company in Mountain View, Calif., said the ruling likely would spark merger and acquisition activity among software makers. "You should let market forces take their course," he said.
Mr. Landan said the biggest loser from the ruling, aside from PeopleSoft, is SAP, which gained market share during the battle but could face invigorated competition if Oracle completes the deal. "If there's somebody that should be unhappy about this, it is SAP," he said.
Possible prey in a consolidation wave could be niche software vendors such as Veritas Software Corp., Siebel Systems Inc., BMC Software Inc. and BEA Systems Inc., many of which have recently missed financial targets.
Oracle's victory also could provide a rationale for further software mergers. Oracle drew criticism last year when executives said they wanted to buy PeopleSoft and effectively ditch its product line. The deal is predicated on Oracle's ability to radically slash PeopleSoft's development and marketing costs while retaining its customers and their more than $1 billion in annual payments for software upgrades and support.
Judge Walker paid little heed to the testimony of software customers who testified against the merger. "Unsubstantiated customer apprehensions do not substitute for hard evidence," he wrote. David Balto, an antitrust attorney with Robins, Kaplan, Miller, & Ciresi LLP, called the ruling "unprecedented. It ignores the testimony of customers that uniformly opposed the merger."
-- John R. Wilke contributed to this article |
