Oracle Faces Decision

States form group to probe vendor's bid for PeopleSoft.

Oracle Corp. is feeling intensifying pressure in its quest for PeopleSoft Inc.

Late last week, sources confirmed that 15 states have formed a working group to look at the antitrust issues involved in the proposed takeover. While the implications of such a move vary widely, the move indicates a growing skepticism by outsiders of the proposed transaction.

The action follows the U.S. Department of Justices second request to Oracle last week for more information on the $6.3 billion buyout offer.

The 15 states, including Texas, California, Massachusetts, Delaware and Montana, formed the group on behalf of their attorneys general, according to sources familiar with the group. Legal experts say the formation of the group in itself means there is enough regulatory concerns on the states behalf to warrant the allocation of resources to look further into the proposal.

"That doesnt mean it will result in a challenge [to Oracle] by the DOJ or that a federal court would agree and block the transaction," said Charles Biggio, a partner at Akin Gump Strauss Hauer & Feld LLP, in New York, and former deputy attorney general in the antitrust division of the DOJ. "But if you look at history where states are concerned, more often than not, you see some action taken, either a restructuring or an effort to block the deal."

Oracle officials acknowledged having conference calls with the working group. "This is just part of the states normal review process for any merger in any industry. Its important not to confuse process with outcome," said Oracle spokeswoman Jennifer Glass, in Redwood Shores, Calif. "We have pledged our full cooperation."

The DOJs second request for information from Oracle, on the other hand, suggests significant antitrust violation concerns, according to Biggio. If the department raises objections to the merger, its investigation could drag on for an unforeseeable length of time. If not—and experts think this likely—it could take less than 30 to 45 days.

"The Justice Department has a tendency to look at transactions if there have been issues raised by customers," said Ken Marlin, managing partner of the high-tech investment bank Marlin & Associates LLC, also in New York. "The entire essence of the antitrust laws is to protect the customers. And in this case, you have PeopleSoft requesting that customers make their views known to the DOJ."

Oracle pledged cooperation with the DOJ, but the company also said that because that cooperation will require significant resources, it indefinitely postponed a July 16 hearing in its suit against PeopleSoft, of Pleasanton, Calif., and J.D. Edwards & Co., which PeopleSoft is planning to acquire.

Oracles suit alleges that PeopleSoft board members breached their fiduciary responsibility, and it seeks to nullify the proposed J.D. Edwards acquisition and a PeopleSoft bylaw that thwarts hostile takeover bids by raising the cost of such a proposal.

Meanwhile, Oracle is facing a July 7 deadline to publicly withdraw or extend its offer. Although Oracle officials declined to comment on their plans, industry analysts suggest the only reason the company would consider withdrawing the tender offer is if it became clear that there would be an antitrust case against it.

While Oracle has wooed PeopleSoft investors and raised its offer since it was first tendered, PeopleSoft CEO Craig Conway has repeatedly said the offer is too low. Last week, Conway got new ammunition, announcing preliminary second-quarter earnings of 13 to 14 cents a share, besting the companys earlier guidance by about 17 percent.

"One thing everyone agreed to from the beginning is that PeopleSoft could not possibly make its quarter earnings," Conway said in a conference call. "Gartner [Inc.] immediately [after Oracle announced its intent to buy the company] issued an alert for its clients to stop purchasing PeopleSoft. Im happy to report many did not."

Additional reporting by Lisa Vaas