Pyrrhic victory?
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Oracles battle to buy PeopleSoft continues, but both parties have suffered collateral damage.
When the US competition courts decided in September to allow Oracle to proceed with its $7.7 billion hostile bid for rival application vendor, PeopleSoft, it was seen as a defining moment in the rancorous takeover battle. PeopleSoft's defenders - including most staff and customers - feared that the will of key shareholders would now crumble as Oracle renewed its assault.
Even they, however, could not have foreseen how the drama would unfold. Before the month was out, the PeopleSoft board had fired Craig Conway, its CEO and chief defender against Oracle, citing a "loss of confidence in his ability to lead the company". Although the board reiterated that it had unanimously agreed to fight the bid, puzzled observers assumed this was a white flag and that talks with Oracle would soon begin.
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But it soon became clear this was not the case. PeopleSoft's strong sales figures surprised analysts, while Conway's departure, it seems, was down to his personal style and serious disagreements with other executives.
These disagreements, coupled with Oracle's declining licence sales, show just how much damage the protracted battle has been causing at the two companies. Since June 2003, when Oracle first launched its takeover bid, SAP, the market leader, has been growing fast - sales were up 23% in its most recent quarter.
George Lawrie, a senior analyst at Forrester Research, says that Oracle and PeopleSoft have been so embroiled in the acquisition battle that they have fallen behind technically. "SAP's NetWeaver, for example, has advanced greatly both in terms of market share and technology over the past year," he says, "while the other two companies' equivalent products have lagged behind."
SAP has also looked sharper in the field. According to Leo Apotheker, SAP's president of global field opportunities, it has gained ground because it now offers more software targeted at vertical markets, and has appointed more resellers and partners. Even troubled implementations at MFI, Boots, and BA have not overly concerned strategists at SAP, which has a roadmap for radical improvements ahead.
Meanwhile, sales figures show why Ellison thinks consolidation is essential. PeopleSoft's new licence revenues fell to $606 million for the 12 months to June 2004, dropping below Oracle's reported new licence sales of $615 million for the 12 months to 31 May.
But since then, Oracle's quarterly licence revenues have deteriorated - down 27% in the America's region and 49% in Europe during the quarter to 31 August. Sales totalled just $69 million.
In comparison, PeopleSoft's third quarter licence sales ending in September, helped by a customer assurance scheme that has been seen as a poison pill takeover defence, are forecast to come in at around the same as last year - just above $161 million.
That strong performance, however, has been overshadowed by management disagreements, and most analysts think events are still running Oracle's way. Throughout the battle, PeopleSoft has clung to three justifications for spurning Oracle's advances: First, that the deal would never clear antitrust objections; second, that the offer price was inadequate; and lastly, that its customers would suffer as a result of
Oracle CEO Larry Ellison's intent to stop marketing all PeopleSoft products. Oracle has eliminated PeopleSoft's first defence by winning the antitrust battle in the US. Experts say the decision is unlikely to be overturned.
Nor should PeopleSoft hold out much hope of European regulators coming to its rescue. The European Commission (EC) issued a 'statement of objection' to the merger in March 2004, but has been waiting on the US decision.
Tom McQuail, a partner at Lovells specialising in European and UK competition law, says this is exceptional. "By waiting, the EC seems to be saying, 'We're going to allow the US to make up their minds for us'." The EC's final decision is expected by the end of October 2004.
Oracle is left with the price problem. If it can convince PeopleSoft shareholders that its cash offer of $21 per share is attractive, hurdles like the board's 'poison pill' provision will melt away.
PeopleSoft may yet hope for a friendlier buyer than Oracle, with its close technology partner IBM cited as a possibility - albeit an unlikely one.
Meanwhile, recent market research from Techtel shows that Oracle's reputation has been tarnished. One in four IT professionals said they hold Oracle in low regard; and its corporate image has dropped to a 12-year low. Clearly, Ellison has a lot of rebuilding to do.
