The U.S Department of Justice and Oracle released their “conclusions of law and fact” Friday, with each stating why it should prevail in the governments antitrust lawsuit seeking to block Oracles hostile buyout of PeopleSoft.
The briefs, filed in U.S. District Court in San Francisco, will be the basis for closing arguments before U.S. Ninth District Judge Vaughn Walker scheduled for July 20. Walker will study the briefs as he considers whether the government has proved its case that the Oracle Corp.-PeopleSoft Inc. merger is anticompetitive.
Court observers have said it may take Walker one to two months to render a verdict in the case.
In its 15-page brief, the DOJ argued that the buyout would effectively give Oracle a 47.4 percent share of the U.S. market for “high-function” financial management software. It would have a 69.7 percent share of the U.S. market for human resources management software. These levels are “significantly above” the legal guidelines established in earlier antitrust cases, the DOJs brief said.
The DOJ defended its definition of the “high-function” enterprise application software market, stating that the court shouldnt include companies such as Microsoft Corp., Lawson Software Inc. and American Management Systems Inc., which it says sell products to SMBs (small and midsized businesses) rather than to the largest corporations.
Oracle “has not offered sufficient evidence that the entry or repositioning” by these companies “would be timely, likely and of sufficient magnitude to replace the competition lost” though Oracles buyout of PeopleSoft.
Any claims that the buyout would result in market efficiencies “will not overcome the anticompetitive effects” of the transaction, the DOJ held.
The government rejected Oracles argument that it needs the money and ongoing cash flow it would gain from the merger to fund future growth to stay competitive with IBM and Microsoft. Federal law requires that any efficiency gained must “reverse the anticompetitive effect, not that the transaction will provide some net social benefit,” the DOJ argued.
The government also argued that the buyout would “substantially lessen” competition in the United States, which is the only appropriate market “in which to analyze the competitive effects” of the buyout.
Effect on Competition
Oracle argued that DOJs definition of the markets parameters is too narrow because both the buyers and vendors are global enterprises.
Even after the merger, there would be enough companies selling this software worldwide that it would be difficult for Oracle to control prices or arbitrarily raise them to the detriment of customers, Oracle argued.
Oracle also rebutted the governments argument that the merger would “chill innovation” in the market. It claimed that testimony showed that “Oracle has, and will continue to have, an incentive to engage in product innovation because it faces vigorous competition from much larger rivals” in the market.
Oracle has also argued that the evolution of an “application integration layer” has “brought application suite vendors” such as Oracle, PeopleSoft, SAP and Microsoft into direct competition with middleware providers such as IBM and BEA Systems Inc. Middleware is part of the “technology stack” that software vendors have to support to be competitive, it said.
Oracle claimed that “competition among SAP, Oracle, IBM and Microsoft” to support the technology stack “will provide a continuing spur to innovation.” Oracle claimed that PeopleSoft has no choice but to seek a merger with a company that can support the technology stack because it cant provide this technology itself.
Meeting the Burden
The governments claim that PeopleSoft customers would face “migration costs, higher maintenance fees and a reduction in quality of ongoing upgrades” of their installed PeopleSoft applications is “both factually and legally deficient, Oracle contended.
Instead, Oracle asked the court to find that the companys “economic incentives, and indeed the entire rationale for the PeopleSoft acquisition, require Oracle to maintain highly competitive support and maintenance practices.”
After reading both sides briefs, one antitrust lawyer said it looked like Oracle might have presented the stronger case.
On that particular point, “I see much more that makes sense to me as an antitrust lawyer in Oracles proposed conclusions of law than I see in the governments,” said Paul H. Friedman, an antitrust specialist and partner with Dechert LLP of Washington.
“What I have said from the beginning is that it is critically important for the government to provide evidence that supports the market that it has proposed,” Friedman said. The government could lose the case if the judge finds that it hasnt met its burden of proof in this area, he said.
During closing arguments July 20, “a great deal of the argument will focus on the market definition,” he said. “Has the government proved there is a high-function [financial management] market and a high-function” human resources management software market?
Federal courts have on occasion denied government requests for injunctions to block mergers that it deemed were anticompetitive. In 2001, U.S. District Court Judge Ellen Huvelle rejected the DOJs request for a permanent injunction barring Sungard Data Systems Inc. from buying out Comdisco Inc. That case has been cited in arguments in the Oracle-PeopleSoft case.