PeopleSoft fracas could spark software M&A

Siebel, BEA Systems also on Ellison wish list

NEW YORK - Thursday's pro-Oracle Corp. decision on the U.S. Department of Justice's attempt to block Oracle's proposed takeover of PeopleSoft Inc. could have ramifications for the broader software market: Most software stocks rose in Friday trading as investors and analysts viewed the DOJ's loss as a signal for Oracle and other software companies to go shopping for acquisitions.

Oracle still faces significant hurdles in its bid to take over PeopleSoft, including strong opposition from PeopleSoft's customers and executives, who can use anti-takeover provisions in the company's bylaws to resist pressure from shareholders to accept Oracle's $7.7 billion offer. But one thing Oracle Chief Executive Officer Larry Ellison made clear during the DOJ-Oracle trial is that PeopleSoft is just one item on his shopping list.

In a videotaped deposition, Ellison listed CRM (customer relationship management) leader Siebel Systems Inc. as his second-choice target, followed by middleware vendor BEA Systems Inc. One of the government's exhibits at the trial was an April 2003 Oracle board presentation on potential acquisitions, which included detailed examinations of the pros and cons of buying PeopleSoft, Siebel and BEA along with Sybase Inc., Business Objects SA, Lawson Software Inc., Cerner Corp., J.D. Edwards & Co. (which PeopleSoft later purchased), Documentum Inc. (bought by EMC Corp.), and SCT Corp. (bought by SunGard Data Systems Inc.).

Microsoft Corp. revealed it has considered stepping up its efforts to crack the business applications market with the help of a splashy acquisition: It disclosed talks with SAP AG's management about buying the company, an idea Microsoft abandoned after deciding such a large deal would be too risky. The company now says it's content to grow its CRM and ERP (enterprise resource planning) business organically and through collaborations with partners such as BearingPoint Inc. But many observers -- including the judge who decided the DOJ/Oracle case -- don't believe such protestations.

"(Microsoft Business Solutions head Doug Burgum's) humility about Microsoft’s intentions regarding the failed SAP alliance and the successful BearingPoint alliance was unconvincing. It strains credulity to believe that Microsoft would offer billions of dollars to acquire SAP merely to make data processing easier for customers who use both Microsoft Office and SAP ERP," Judge Vaughn Walker wrote in his decision. "The court discounts Burgum's testimony portraying MBS solely as a mere humble mid-market vendor.

Bank of America Securities LLC titled its research report on Walker's verdict "The Gavel Falls, Let the Consolidation Begin!" Lead author Robert Stimson expects that a PeopleSoft-Oracle union is now "not a matter of if but when," but he also sees the case sparking a broader buying spree.

"We view this as the first step in a major consolidation wave within software that will occur over the next 2-3 years," Stimson wrote.

Industry analysts point out that a consolidation sweep is already underway -- after all, in the seventeen months since Oracle complied its wish list, three of the 10 companies on it were bought by others. Some disagree with the financial analysts, saying they don't think Oracle's actions will accelerate the consolidation.

"I wouldn't say generally this opens the floodgates to more large mergers like this," said Meta Group Inc. analyst David Yockelson. "I think we're going to see more M&A (mergers and acquisitions), but I don't think this is the bellwether for it."

The ripest targets in the market are smaller companies that serve specific industry niches or midmarket customers. While enterprise sales have been slow in the software market in recent years, sales to small and mid-size companies are growing rapidly. Yockelson said that if Oracle does buy PeopleSoft -- and he's among those who considers the deal likely to succeed -- it may be better served to concentrate development on the midmarket product lines PeopleSoft picked up from J.D. Edwards, rather than focusing on PeopleSoft's enterprise applications.

A number of companies have already bought smaller vendors to accelerate their efforts to tap new markets. Microsoft bootstrapped its business applications development by buying Great Plains Software Inc. and Navision A/S, while PeopleSoft got J.D. Edwards, Siebel snapped up hosted CRM vendor UpShot Corp. and banking software maker Eontec Ltd., and EMC bought Documentum to expand its offerings from storage to full-service content management. IBM Corp. has bought more than a dozen of its software business partners to flesh out its middleware products.

But now, with soft sales dragging down the share prices of some of the market's biggest vendors and making them more affordable, top-tier software companies could find themselves targeted by rivals. BEA and Siebel have long been the subject of takeover rumors. Meta Group's Yockelson said he doesn't expect the DOJ/Oracle case decision to prompt other vendors to rush into big, expensive deals, but he does think that in a mature market like enterprise software, vendors will be tempted to expand their customer lists by buying their rivals.

Enterprise Applications Consulting Inc. analyst Josh Greenbaum expects Oracle to continue cutting an acquisitive path through the industry.

"Deep down, I think Larry Ellison realizes he needs to be as much like IBM as possible to beat them," Greenbaum said. "There's a lot of enterprise software companies, more than the market economics can bear right now. This is a legal precedent that lets companies start rolling up the market."

One antitrust expert following the case, attorney Paul Friedman of Dechert LLP, cautioned that beating the DOJ once doesn't give Oracle carte blanche to buy any company it likes. The DOJ tends to learn from its losses, and is perfectly willing to oppose again companies that have vanquished it once, he said.

"They will make a serious effort to take a fresh look at any transaction that comes before them, and to try to base their judgments on the facts peculiar to each case," Friedman said. "That doesn't change."

Companies may also be dissuaded from trying hostile attacks like Oracle's by the ancillary effects of such tactics. A recent report from research firm Techtel Corp. found Oracle's corporate image at a record low ebb, as the company drew its worst scores in more than a decade from IT buyers. Unsurprisingly, some current PeopleSoft customers have scathing views of Oracle.

"We really don’t want to be an Oracle customer. With the statements Larry Ellison has made, it definitely gives us some concern about what he has planned for PeopleSoft." said Andrew Albarelle, principal executive officer of Denver staffing company Remy Corp. He said the uncertainty about PeopleSoft's future hasn't dissuaded him from further expanding his company's PeopleSoft infrastructure, but if Oracle took over PeopleSoft, Albarelle said.

He's more willing to see PeopleSoft fall into the hands of another vendor -- like Microsoft, should it decide PeopleSoft would make a good consolation prize for losing SAP. "That would be fine with us," Albarelle said. "It could be a good thing. We're also Microsoft customers."

IT research firm The Sageza Group Inc. forecasts market consolidation, but hopes it won't happen by Oracle fiat.

"Where we disagree strongly with Ellison is the means by which this irresistible path of consolidation should happen," the firm wrote Friday in a research note. "By simply tossing PeopleSoft out of the market, its sizeable collection of market adaptations will be lost and evolution will be thwarted. Ellison believes that he is speeding up the pace of market evolution and that he's doing a good thing. We would respond with: 'Haste makes waste.'"

In the end, PeopleSoft may not be able to fend off Oracle, Sageza said - a result it sees as detrimental to PeopleSoft's customers. Their only consolation may be seeing Oracle pay dearly for its hostile takeover. The firm concludes its note: "We would counsel PeopleSoft stockholders -- if forced to face the inevitable -- to hold Ellison to committing as much money as possible for each and every share. He should pay for the waste his haste will incur."

Copyright © 2004 IDG Communications, Inc.

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