Consolidation Changes ERP Landscape

The takeover battle between Oracle and PeopleSoft is only one indication of a shifting industry that has companies seeking to provide a complete IT stack.

The U.S. Department of Justices effort to block Oracle Corp.s proposed $7.7 billion takeover of PeopleSoft Inc. is in the hands of U.S. District Judge Vaughn Walker, who heard final arguments in the trial late last month.

While Walkers decision in the case, which is expected no sooner than next month, will end one skirmish in the battle of enterprise software providers, the war for control of the ERP (enterprise resource planning) software industry will be settled by larger forces.

In the short term, the fate of Oracles hostile bid to acquire PeopleSoft faces additional challenges beyond the federal courts ruling, including an ongoing antitrust investigation by the European Commission, civil suits filed by Oracle and PeopleSoft, and shareholder approval.

Foremost among Oracles challenges is the ECs impending ruling on whether the deal would violate the European Unions antitrust rules. Should the commission rule against the deal, a combined Oracle and PeopleSoft would be barred from doing business in Europe.

The EC said it has put off its decision while awaiting more information from Oracle, but antitrust expert Paul Friedman said he doesnt expect the EC to announce its ruling until after the DOJs case works its way through the U.S. courts. If the EC does rule against Oracle, however, the PeopleSoft deal could be dead.

"Once the commission issues a statement of objections, the parties cannot consummate unless theyve proved [the deal will not be anticompetitive]," said Friedman, a partner with Dechert LLP, in Washington. "[Oracle] will need to resolve the EU issues" to move forward with its plans to acquire PeopleSoft, Friedman said.

At the same time, a civil suit filed by PeopleSoft that goes to trial in November seeks to end Oracles hostile takeover bid on the grounds that the tender offer was initiated only to harm PeopleSofts business. Filed in California state courts, PeopleSofts suit alleges that Oracle, of Redwood Shores, Calif., never really intended to purchase PeopleSoft, based in Pleasanton, Calif., but simply wanted to disrupt PeopleSofts business.

/zimages/2/28571.gifRead more here about PeopleSofts lawsuit.

The prolonged trial and buyout pursuit by Oracle have brought "harm to the customers and harm to the business," said PeopleSoft President and CEO Craig Conway in an interview after the trials closing arguments. "I was tired of the litigation a long time ago," Conway said.

Separately, Oracle has filed its own civil suit against PeopleSoft in a Delaware court. Oracles suit seeks to force PeopleSoft to dismantle its poison pill anti-takeover measure that would refund two to five times the amount of some customers license fees if the companies merge and if support for PeopleSofts products stops within a specific time frame.

After all that is cleared, Oracle must still persuade PeopleSoft shareholders to tender their shares.

In the longer term, Oracle and its competitors will need to find a way to hang tough in an increasingly consolidated business software market. Oracle said it must acquire PeopleSoft to remain viable—not so much in ERP, where it and PeopleSoft play, but in the infrastructure software provider space that bigger competitors IBM, Microsoft Corp. and, increasingly, SAP AG dominate.

While some question how well a PeopleSoft purchase will help Oracle strengthen its infrastructure offerings, few question Oracles assumptions about the competitive landscape.

/zimages/2/28571.gifIn announcing low second-quarter earnings, PeopleSoft officials blamed the Oracle trial for the slump. Click here to read more.

During the trial, it came to light that Microsoft initiated merger talks with SAP last year in a move that would have created the largest applications and infrastructure company in the world. In addition, internal Microsoft e-mail brought out in the Oracle-DOJ trial suggested that IBM may also have its eye on SAP.

Regardless of which companies merge, the applications market is consolidating because customers want to buy IT from fewer vendors, according to Katherine Jones, an analyst with Aberdeen Group Inc., in Palo Alto, Calif.

Oracle has an advantage in providing a complete IT stack because of its database and application server expertise, said an IT manager at a Fortune 500 manufacturer.

"If you can make one investment and you get the underlying technology to write whatever you need—reports, development language to write a front end—it would be helpful if you could buy that all from one shop," said the IT manager.

"Thats really what youre buying, so you really have to buy the technology once. But theyve got to stop trying to make money on every piece of the pie by not trying to get margins on every piece of the deal, which is whats killing Oracle."

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