Almost a year to the day after Oracle Corp. made its hostile bid to acquire rival PeopleSoft Inc. and consolidate the second- and third-largest enterprise application companies, the saga is moving into what likely will be its final stage.
Like any good melodrama, the will wind up in a courtroom as the U.S. Department of Justice this week will seek an injunction to block the $7.7 billion deal on grounds that it would breach antitrust laws. The outcome of the trial in U.S. District Court in San Francisco will determine whether the offer proceeds.
The conclusion of hostilities between Oracle, of Redwood Shores, Calif., and PeopleSoft, of Pleasanton, Calif., cant come too soon for the companies and their customers.
The enterprise software industry is at a crossroads as customers are demanding more open environments that easily integrate with third-party applications. Oracle and PeopleSoft have both looked to acquisitions to help in this area, but some customers say the resulting turmoil has been a distraction.
"We just as soon wish this thing had never happened," said PeopleSoft customer Mike TenEyck, manager of administrative information systems at Texas Christian University, in Fort Worth. "When something like this comes, its just a distraction; it takes a lot of work, time and money to fight this off. Thats resources [PeopleSoft] could be putting in the product."
To get the injunction, the DOJ must prove there is an appreciable danger of anti-competitive consequences if the merger happens. At the heart of the trial, which is scheduled to last until July 2, will be what makes up the relevant product market. The DOJ will claim that Oracle, PeopleSoft and SAP AG make up the core of the enterprise applications market, while Oracle will argue that it competes in a much larger pool for enterprise clients.
According to a brief filed last week, the DOJ defined enterprise software as having extensive functionality; scalability to support thousands of users and tens of thousands of simultaneous transactions; and tightly integrated, highly customizable applications. The vendors also have to be credible in the marketplace, according to the DOJs definition. Oracle, in its pretrial brief last week, called that definition "the most confusing, meaningless market definition ever pursued in a government merger case."
To prove its point, the DOJ will call on several large PeopleSoft customers, including DaimlerChrysler AG, Kerr-McGee Corp., Greyhound Lines Inc. and the state of North Dakota to prove that options for enterprise software boil down to the big three.
The trial will also feature testimony from a half-dozen executives from Oracle, including Chairman and CEO Larry Ellison; PeopleSoft CEO Craig Conway; and top executives from SAP, IBM and Microsoft Corp.
The DOJ learned in an earlier antitrust case against Microsoft that testimony from the companies involved in the transaction is the most helpful, the government has said. People remember Microsoft Chairman Bill Gates testimony from that trial, and the DOJ is expecting Ellisons remarks to be memorable as well. Officials at the Washington-based agency have said they believe evidence coming directly from Oracle will support their view of the marketplace.
In its defense, Oracle will call to the stand a number of its competitors, such as Siebel Systems Inc., Lawson Software Inc. and ADP Inc., to show that those companies vied with Oracle—and presumably won—enterprise software contracts. To back up that testimony, Oracle will also present so-called bidding documents—a move antitrust attorney Robert Christopher, of Coudert Brothers LLP, calls trifling. This paperwork from PeopleSoft and SAP sales engagements show which software vendors competed on enterprise deals.
"Virtually any company that proclaims its expertise in that area might be able to submit a bid in connection with a given contractual opportunity, but that does not mean they have the capability to fill that bid," said Christopher in Palo Alto, Calif. "So the ultimate test is not who bids on the projects but who got the [deal]."
Microsoft, of Redmond, Wash., is expected to play a pivotal role in the trial. Oracle will point to Microsoft, with four business software packages for the midmarket, as an emerging competitor in the enterprise software market. But the DOJ is counting on Microsoft to say that it does not intend to enter the enterprise market for several years—a claim that is suspect, even to IT professionals who dont use Microsofts business software.
"Its a commonly known secret that Microsoft wants to get in this space, and they have made purchases to set up that way. The data is all there," said Chris OBrien, CIO for the city of Chicago and an Oracle E-Business Suite customer.
Handicappers are not picking a winner at this point, and the judge in the case could take months to come to a decision. But if the DOJ does not prevail in the case, the agency could appeal to the U.S. Supreme Court. The European Commission is still investigating the deal and could block a merged Oracle-PeopleSoft from doing business in Europe, which would be a deal stopper.