IssueAlert Emerging Technologies ~
August, 2003
PeopleSoft:
To Acquire or Be Acquired
By Christopher Perdue, Director, Market
Research, UtiliPoint
[News Item from the Associated Press] Oracle Corp. mounted
a $5.1 billion hostile takeover bid Friday for business software
rival PeopleSoft that the target's chief executive angrily rebuffed
as a blatant attempt to derail his own merger plans with J.D.
Edwards.
Analysis
The enterprise applications landscape could end up
looking noticeably different than it did a week ago. The combination
of PeopleSoft (NASDAQ: PSFT) and J.D. Edwards (NASDAQ: JDEC)
would have more than $2.7 billion in annual revenue, and over
11,000 customers. If Oracle (NASDAQ: ORCL) succeeds in its takeover,
it will have approximately 25 percent of the enterprise application
market, and be second only to SAP.
Oracle's success could also see J.D. Edwards become a target
for other vendors with aspirations in the enterprise applications
space. Oracle said that it wants to complete the PeopleSoft
deal first, and then determine whether to proceed with the acquisition
of J.D. Edwards.
All three companies have been facing a difficult climate over
the last couple of years. Customers have been delaying spending
on technology needs because of the sluggish economies in the
U.S. and overseas. What's more, when customers do purchase software,
they tend to only buy enough capacity for current needs instead
of buying enough to handle growth.
Point, Counter Point
According to Oracle CEO Larry Ellison, PeopleSoft's
CEO, Craig Conway, approached him a year ago to discuss a possible
merger of their companies. Mr. Ellison told analysts during
a conference call last week that he is offering PeopleSoft shareholders
a "much safer road" than the alternative: an independent
PeopleSoft, whose revenue is already under pressure, branching
out to compete more directly with Oracle and SAP, and increasingly
against Microsoft, which has been steadily growing in the market
through its own acquisitions.
Mr. Ellison also downplayed the proposed economies of scale
of the combination of PeopleSoft and J.D. Edwards. "They
have almost no economies of scale. We would be accretive on
Day 1," he said. "They say they're going to save $80
million," he added. "You could save $80 million by
not offering free Coke to your employees for a month."
Mr. Conway's accounts of past discussions with Oracle are quite
different. According to Mr. Conway, PeopleSoft approached Oracle
last year about buying Oracle's applications business. In a
recent statement, Mr. Conway called the takeover play "atrociously
bad behavior from a company with a history of atrociously bad
behavior." Executive VP and CFO Kevin Parker called it
"a defensive strategy born out of the PeopleSoft and J.D.
Edwards merger."
Mr. Conway also said that no one from Oracle had made an attempt
to contact him before announcing the cash offer in a press release
late on Friday night. Mr. Conway said: "If the intent was
genuine, you would think it would be evidenced by a phone call.
J.D. Edwards's chief financial officer Rick Allen said it appeared
that Oracle's offer was made to disrupt the businesses of PeopleSoft
and J.D. Edwards. "To the extent that victory is fear,
uncertainty and doubt in the marketplace, Oracle has done that,"
Allen said. "It will all be sorted out in the coming weeks."
Oracle's bid of $16 per share only represented a premium of
5.9% over PeopleSoft's closing price on June 5. This makes it
unlikely that shareholders will accept the deal, and adds fuel
to the fire that the offer was made in an attempt to disrupt
the acquisition of J.D. Edwards. That being said, Oracle's offer
must be fairly serious. If PeopleSoft called Oracle's bluff,
Oracle would have to play ball or there would be a variety of
legal implications.
It appears PeopleSoft has good reasons to merge with J.D. Edwards.
The products and services offered by PeopleSoft and J.D. Edwards
are complementary, and would enhance customer choice through
expansion of the companies' offerings. PeopleSoft has had a
tough time being viewed as more than a human resources and financial-application
player despite offering customer-relationship management and
other software modules.
Even so, like any merger or acquisition, the combination of
PeopleSoft and J.D. Edwards would encounter challenges. The
architectures underlying the two companies' main products are
dramatically different. Many of J.D. Edwards' 6,752 customers
run on IBM's AS/400 platform and have no intention of changing.
PeopleSoft's 5,133 customers are used to running their software
via a Web browser. The two companies would need to also meld
different sales cultures.
With Oracle's offer PeopleSoft customers such as Entergy, Detroit
Edison, the Bonneville Power Administration, and Questar now
face a new concern - a potential end to their own products'
lifelines. While Mr. Ellison has said that Oracle would offer
enhanced support for PeopleSoft products and incorporate advanced
features of the software into its e-Business Suite, Oracle would
not actively sell the software to new clients. Oracle has said
that it would provide automation tools to smooth migration to
its software, but moving to a new ERP platform is typically
costly.
Another concern with regards to Oracle's proposed acquisition
is that the company risks getting stretched thin supporting
multiple products and platforms. Oracle could face huge challenges
and costs converting PeopleSoft's customers to Oracle's software.
However, some PeopleSoft customers were already facing unwelcome
pressure from PeopleSoft to buy new versions of software programs,
and therefore might not resist a switch to Oracle
Innovation and interoperability can suffer when vendors take
a buy-versus-build approach. This is likely one reason why SAP
is the current market leader for ERP. SAP has a strategy of
not acquiring customer base or market share.
Winners & Losers
While the outcome of the proposed acquisitions are
not known, there does seem to be some conclusions that can already
be drawn. For example, Oracle seems to win no matter the outcome.
Either they purchase PeopleSoft without paying an enormous premium,
or they have managed to complicate the merger of PeopleSoft
and J. D. Edwards deal, and steal their press and enthusiasm.
Oracle's bid has created a great deal of uncertainty for technology
executives buying enterprise software from PeopleSoft or J.D.
Edwards. The uncertainty is likely to hurt both company's short-term
sales as companies hold off on buying their software.
Furthermore, savvy negotiators could benefit from the uncertainty.
Technology executives currently evaluating PeopleSoft or J.D.
Edwards may be able to squeeze out better prices. They could
cast doubt on PeopleSoft's ability to integrate J.D. Edwards
smoothly, and tout their ability to turn to SAP or Oracle for
enterprise software to bolster the case for price concessions.
Additionally, if Oracle completes the PeopleSoft acquisition,
it could then prevent the J.D. Edwards deal. Seeing as Mr. Ellison
has called the PeopleSoft/J.D. Edwards deal "a very risky
merger," one could conclude that this is likely.
Perhaps the biggest winner with regards to the potential acquisitions
is SAP. The company may be able to win market share while rivals
Oracle, PeopleSoft, and J.D. Edwards focus on acquisition and
integration issues. SAP has already launched a large marketing
campaign targeting customers of PeopleSoft and J.D. Edwards
in a move to capitalize on the disruption caused by Oracle's
bid.
SAP is currently putting together “special offers" for
clients of PeopleSoft and J.D. Edwards, enabling them to trade
their software licenses against MySAP ERP licenses at advantageous
conditions.
It will likely be weeks before the offers are resolved. One
thing is certain - after years of waiting for a wave of consolidation
among major technology companies, it appears that the future
is now.
