PeopleSoft's future hard to predict

Latest developments raise possibility that Oracle acquisition may go through

The tea leaves on Oracle's takeover plans for PeopleSoft have never been harder to read than they are right now.

For most of the 16 months Oracle has waged its campaign to win control of its rival, the chances of the deal's completion have been firmly in the "unlikely" category. The expected opposition of antitrust regulators was one factor, but the biggest obstacle for Oracle was the resistance of PeopleSoft's management. So long as PeopleSoft was led by a chief executive officer (CEO) claiming the company wasn't for sale to Oracle at any price, Oracle had little hope of successfully acquiring PeopleSoft through its tender offer to shareholders, now valued at $7.7 billion. Thanks to PeopleSoft's poison pill, the company's board of directors can essentially deflect Oracle's advances for as long as they remain in office.

But Friday's firing of Craig Conway as PeopleSoft's CEO, followed by PeopleSoft director Steven Goldby's testimony this week that he would be open to discussions with Oracle if the price were right, has changed the dynamics of the situation between Oracle and PeopleSoft from standoff to detente.

Analyst guesses are all over the map about how likely the deal is now to be completed. On the one hand, the new CEO selected by PeopleSoft's board strikes long-time company customers and observers as an odd choice if the board hopes to quickly strike a deal with Oracle. David Duffield, one of PeopleSoft's founders, has a reputation for being deeply committed to PeopleSoft's customers, who overwhelmingly oppose the deal.

On the other hand, with shareholder interest building in the cash Oracle is offering and with antitrust blocks to the deal nearly gone, Oracle's board may not be able to continue its resistance. Goldby said Tuesday that he would consider negotiating with Oracle "if there is ever an indication that Oracle is willing to pay what we consider to be the right price for the shareholders to get for this company, and there is a high certainty of being able to close a transaction quickly." The Yankee Group said in a research note that it believes PeopleSoft's executive team "is clinging to the hope that Duffield can muster support to prevent shareholders from voting in favor of the buyout, but is largely resigned to the takeover."

Goldby's testimony came at the trial taking place this week in Delaware's Chancery Court, which Oracle has asked to void PeopleSoft's antitakeover "poison pill" provision and its "customer assurance program" promising customers compensatory payments if PeopleSoft is acquired by a company that disrupts its product development and support plans. The poison pill provision in PeopleSoft's bylaws allow its board to inflate the company's outstanding shares total and make a hostile takeover prohibitively expensive.

On the first count, Oracle faces long odds, experts say. Delaware courts haven't overturned a poison pill since the late 1980s, according to William Lawlor, a Dechert LLP partner in Philadelphia who leads the firm's mergers and acquisitions group.

But if Oracle opens discussions with PeopleSoft's board and wins their support for the acquisition, the poison pill issue becomes moot. How likely is that? It's impossible to tell.

While Goldby seemed to open a door to Oracle in his testimony, he also reiterated that PeopleSoft's board considered and rejected as inadequate the $26 per share cash offer Oracle made earlier this year, before Oracle lowed its bid to the current $21. He also emphasized that decisions about the Oracle bid are made by a five-person committee of PeopleSoft's independent directors. While Conway, and now Duffield, could comment on Oracle's offer, the CEO has little direct influence over whether it will be accepted -- meaning that the resistance so far to the bid has come unanimously from all of PeopleSoft's directors.

Oracle could advance its bid by raising its offering price, but there's only so high the company can go before it risks alienating its own shareholders. Financial analyst Chris Kwak, of the Susquehanna Financial Group LLP in New York, said that if the paying price creeps much higher, Oracle would generate better value for its shareholders by spending the billions it would pay for PeopleSoft on a stock buyback instead.

"A lot of people believe Oracle will have to raise its bid," Kwak said. "Our view has been that $21 (per share) is a pretty generous offer. It may be that the intrinsic value of PeopleSoft is less than $21 (per share), but the value of PeopleSoft to Oracle is more than that, if they are successful in finding synergies and reducing headcount. Still, if the price gets too high -- beyond $23 or $24 (per share) -- Oracle would do better to back away and buy back its own stock."

As PeopleSoft customers continue to face uncertainty about the future of their vendor, the best thing they can do is update their software to the latest versions to protect their investment if PeopleSoft's development is disrupted, advises Meta Group analyst Barry Wilderman. He gives the acquisition an 80 percent chance of happening at this point, but whether or not it would be a good move on Oracle's part depends on how well it supports PeopleSoft's customers and how many they retain, he said.

"Some people will migrate to Oracle's applications, but some will go to rivals like SAP, and some will stay on PeopleSoft and go to third-party providers to maintain the applications," Wilderman said. "If Oracle can carry over, say, 80 percent of PeopleSoft's customer base, this is a good deal for them. If it's 60 percent, it's not a good deal."

Customers relying on PeopleSoft's customer assurance program (CAP) to protect their investment may be out of luck: Dechert's Lawlor said that while Judge Leo Strine is unlikely to void PeopleSoft's poison pill, he might "split the difference" and invalidate the CAP.

"Oracle has put together a pretty good case," he said. "They may get a sympathetic hearing from Judge Strine. If I were betting, I would say he may very well strike down the CAP as being an overly draconian measure. It's a little muddy how the court would fix the problem there, but I think there's a good chance he will look at it."

Copyright © 2004 IDG Communications, Inc.

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