Update: PeopleSoft's CEO Conway gets the boot

Board of directors replaces Conway with PeopleSoft founder and chairman Dave Duffield

NEW YORK - PeopleSoft Inc. Chief Executive Officer (CEO) and President Craig Conway was shown the door on Friday by the company's board of directors, who immediately replaced him with Dave Duffield, PeopleSoft's founder and chairman.

Conway's dismissal was due to a "loss of confidence" in the CEO's ability to lead PeopleSoft, the Pleasanton, California, company said in a statement. The board of directors also promoted Chief Financial Officer Kevin Parker and Executive Vice President Phil Wilmington to co-presidents and Aneel Bhusri, a former PeopleSoft executive now working as a venture capitalist, to vice chairman of the board.

"It's great to be back," Duffield said on a conference call following the announcement. He served as PeopleSoft's CEO from its incorporation in 1987 through 1999, when he turned the reins over to Conway. Duffield said his re-appointment to the CEO spot is permanent.

PeopleSoft also said Friday that its license revenue in the quarter ended Thursday topped US$150 million -- a pleasant surprise to many financial analysts, who feared worse after PeopleSoft said last week that its license revenue for the quarter topped Oracle Corp.'s. Oracle reported $69 million in application revenue in its most recent quarter; while PeopleSoft wouldn't comment further on its revenue, analysts generally took its statement to mean it had only edged past Oracle's disappointing results.

The CEO dismissal at the end of a respectable quarter puzzled some analysts. "I think it was a huge surprise," said American Technology Research Inc. analyst Donovan Gow. "$150 million in license revenue is strong -- I think pretty much everyone, myself included, thought that the quarter would be a complete disaster. On the one hand, they're saying we've lost faith in the CEO; on the other hand, they're saying they're gaining traction with new and existing customers. Obviously, they're not giving him credit for that."

Speaking on behalf of PeopleSoft's board, director George "Skip" Battle declined to go into specifics about the reasons for the lost faith in Conway. The decision was made and approved Thursday night by the board's five independent directors, with Duffield and Bhusri abstaining from the vote, he said. PeopleSoft's eight-person board had consisted of Duffield, Conway and six outside directors including Bhusri.

"The very simple and plain truth is that over time the board has become increasingly concerned with Craig's leadership and essentially had lost confidence," Battle said on the conference call. "There's no smoking gun, there's no accounting irregularity. He was not terminated under the for-cause provision in his contract."

Battle denied that PeopleSoft's ongoing battle with Oracle, which is continuing a hostile takeover campaign it launched in June 2003, had anything to do with Conway's firing. PeopleSoft's board has consistently rejected Oracle's offer, now valued at $7.7 billion. Conway, a former Oracle executive, strongly opposed the deal and was seen as having a personal stake in ensuring it did not occur. But Battle said PeopleSoft's transaction committee, comprised entirely of independent directors, unanimously agreed to reject each of Oracle's bids and was never at odds with Conway about the Oracle deal.

Financial analyst Charles Di Bona, of Sanford C. Bernstein & Co., said he sees deeper problems at the company than the confusion created by Oracle. "I think a large part of the loss of confidence really is more around the J.D. Edwards situation than Oracle," he said, referring to PeopleSoft's work integrating the smaller business applications vendor it purchased one year ago. "$150 million is still down 9 percent year-over-year. There's not as much good there as (Wall) Street thinks. This is not a growing company, this is an ailing company. I think that's getting lost in the noise because people thought it was not just ailing but on life support."

Duffield said his priorities at PeopleSoft will be returning the company to the core values upon which it was founded. "We need a little more in the way of vision and strategy, and I think I'm very good at that stuff," he said.

Forrester Research Inc. analyst Paul Hamerman sees the move as a good one for customers. Under Conway, PeopleSoft moved aggressively on raising maintenance prices and lost some of its reputation as a customer-focused vendor, he said.

"I think there's been an erosion in customer confidence," Hamerman said. "There's been issues about the maintenance pricing and the service levels customers are receiving. In the days when Dave Duffield ran the company, they bonded with their customers and really paid a lot of attention to customer satisfaction. They've decided to step back in and restore some of the original values of the company."

Hamerman also expects to see a more developed technology vision from Duffield, something he feels Conway lacked. PeopleSoft's primary product development strategy for the past year has been what the company calls the "total ownership experience," a push to reduce its software's administrative costs and burdens.

Customer Andrew Albarelle, principal executive officer of Denver staffing agency Remy Corp., said he's surprised at the change but hopeful it will work out for the best. The shakeup comes just one week after PeopleSoft's annual customer conference, at which Conway and other executives made the rounds with customers. "I've spent more time with Craig in the past week than I ever had before," Albarelle said.

Albarelle purchased PeopleSoft's financial software for Remy nearly four years ago, near the start of Conway's tenure, but he has been a PeopleSoft customer at other companies for nearly a decade. He said he's comfortable with Duffield and sees him as a good leader for the company. Even with the turmoil PeopleSoft has been through in the past year, integrating J.D. Edwards and fending off Oracle, Albarelle said he's pleased with his choice of vendor: "To this day I still stand by our decision to purchase PeopleSoft. It's great software."

Services consultant and PeopleSoft customer John Webster, the PeopleSoft programs director for Dakota State University's Center for Remote Enterprise System Hosting, said he hasn't worked with Duffield before but is impressed by Duffield's reputation.

"I've heard nothing but good stories about the guy," Webster said. "It's the fireside stories you hear, about what a genuinely great guy he is, not just a good executive."

Whether Duffield's return will change PeopleSoft's stance regarding Oracle is an open question, analysts said. An Oracle representative said the company had no immediate comment on the news.

"Conway was generally regarded as a big impediment to the deal going through," said American Technology Research's Gow. "I don't necessarily think (Duffield) will be any more likely to accept the bid, but it's very hard to read at this point. The knee-jerk reaction is that the stock price will go up as people expect the deal is more likely."

Indeed, PeopleSoft's shares rose 15 percent in Friday trading on the Nasdaq exchange, to $22.83. Oracle's all-cash offer currently stands at $21 per share.

Forrester's Hamerman said that as PeopleSoft's founder, Duffield is likely to want to see the company remain independent. "I don't think he wants to give up the company, especially to Oracle," he said.

Yankee Group Inc. analyst Mike Dominy challenged that view, though, saying he thinks this marks the end of the road for PeopleSoft's resistance. With the U.S. Department of Justice announcing Friday that it won't appeal a court decision overruling its antitrust objections to a PeopleSoft-Oracle merger, the European Commission expected to approval the deal, and PeopleSoft struggling to grow its sales, Oracle's offer becomes ever harder to walk away from, Dominy said.

"I absolutely believe the developments with Oracle are a factor (in Conway's departure)," he said. Oracle now needs to develop and very clearly communicate a plan for both short- and long-term support of PeopleSoft's customers; disrupting product development and alienating the customers it spent billions to buy would be a waste of Oracle's investment, he said.

Dakota State University's Webster said he hopes Oracle won't succeed, but he sees other customers preparing backup plans in case they do. The program Webster oversees hosts and manages PeopleSoft applications for other schools. Webster is also in the process of launching a commercial offshoot of that program.

"I've been approached by a number of people in the business who are looking at how they remain on the PeopleSoft platform if it's acquired," he said. Webster expects to sign the contract on Monday for his program's first commercial PeopleSoft project, and at this point, the customer is committed despite PeopleSoft's uncertainties. "Once you've made the purchase decision, once the implementation process is ongoing, you're not going to switch," he said.

Webster is optimistic that Duffield will continue opposing Oracle's advances. "I really believe that Duffield, who lived this company and gave birth to this company, will continue to want to own this company," he said. "I just can't see him saying, 'I'm going to sell my shares, take the money and sail off into the sunset.'"

(Laura Rohde in London contributed to this report.)

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