Looking for a Knockout Punch

Exclusive: After posting record Q4 results, PeopleSoft may bulk up through acquisition.

PeopleSoft CEO Craig Conway knows how to bruise his rivals with combination punches. From a revamped software suite to a new management team, Conway has rebuilt PeopleSoft into a lean, highly profitable e-business contender.

Now Conways on the acquisition trail, looking for small companies to round out PeopleSofts product and consulting portfolio. Conway recently discussed his strategy for 2001 with [email protected] Partner editor Joseph C. Panettieri.

SP: PeopleSofts Q4 results were strong. How are you feeling about business in 2001?

Conway: Our company is in good shape, and there are some good macrofactors in play right now. Large companies are Internet-enabling their enterprise applications. That makes life good for PeopleSoft. The second macrofactor that bodes well for us is software. PeopleSoft 8, our latest release, leapfrogged Oracle and SAP. In terms of architecture, were a year and a-half ahead of them.

SP: Can your business remain strong amid the economic slowdown?

Conway: You cant get up and watch Bloomberg without getting a strong daily dose of economic gloom. Its been a bit of a dilemma for PeopleSoft, because our internal metrics have never been better. All of our internal systems [suggest we should] increase our [earnings] guidance to Wall Street, but the weathers cold out there. Were not feeling the economic pressures, but were cognizant of them.

On the [Wall Street] analyst call a few days ago, I decided to stay with our [earnings] guidance for 2001, rather than take it down—but I also didnt take it up. Were comfortable with [2001], in spite of the current economic condition. However, if the economy degrades into a full-blown recession, no company would be immune to that.

SP: Does that mean you support the Feds latest interest-rate cut?

Conway: I support the rate cuts, and Im glad [Alan Greenspan] made them to hold off a full-scale recession.

SP: In the closing weeks of Q4, did you notice any hint of a sales slowdown?

Conway: Not at all, and boy, was I watching [for] it. No question, I was apprehensive. I thought that our sales managers would say theyre having a difficult time getting purchase orders signed. But that wasnt the case at all. Our earnings announcement [beat expectations] in every single category. Every single metric showed a phenomenal Q4.

SP: Your Q4 results mentioned PeopleSofts close relationship with IBM. Have you ever discussed a merger with Big Blue?

Conway: IBM made a decision in Q4 1998 not to be in the application space. They make world-class hardware, operating systems and databases. They have a suite of middleware and a few applications like WebSphere and Lotus. But by and large, IBM concluded that enterprise applications of our type are best left to independent companies. Theyre partnering in this space. It was a deliberate decision that went all the way up to [IBM CEO Lou] Gerstner. When I meet with IBM periodically, I ask if thats still their position. As recently as two weeks ago, it still was. If IBM ever does get into the enterprise application space—if they want to OEM someones product or acquire a company—[we] want to be around that discussion when it starts to bubble up.

SP: Microsoft is acquiring Great Plains. Is that a competitive threat to PeopleSoft?

Conway: I met with [Microsoft CEO] Steve Ballmer after the Great Plains announcement to see what his intentions are. I left [that meeting] feeling much more comfortable than when I arrived.

Great Plains does 100 percent of its business through resellers. And 95 percent of Great Plains customers have fewer than 50 PCs. I wouldnt call that the enterprise market; its the very small-business market.

Microsofts business model has always been about very high volume. That means small business. Theyve also always been about indirect distribution. They dont like to have thousands of direct-sales people. Nor do they want to take the primary support burden. Great Plains fits that model. It was a perfect way for Microsoft to go.

I drove away [from Microsoft] feeling that theyre logically extending their high-volume reseller model. But [Great Plains] is not a midsize play or large enterprise play.

SP: Is PeopleSoft looking to make any acquisitions?

Conway: Yes. Absolutely. At the end of last year, I brought in a new CFO. Then I directed our existing CFO, Steve Hill—a fabulous guy—to run business development and acquisitions. It appeared to be a very fortuitous situation. The market got pounded, venture firms are wringing out their investments, and the valuation of some of these companies is very reasonable.

Steves objective is to go after technology that supplements our development efforts. That involves things like source-code buyouts. I also gave him directives on certain areas where we can evaluate acquisitions. That doesnt necessarily mean billion-dollar acquisitions. Quite a few companies can be acquired for less than $100 million that can accelerate [our] progress into certain markets. Its highly likely well acquire small companies or partners on a small scale in the next 12 months.

SP: Does that mean PeopleSoft will acquire consulting firms?

Conway: You are smack dab in the middle of that industry, so you know it has gone through enormous change in the last year and a half. There was a time that if you had a couple hundred consultants and vertical expertise, you were extremely valuable in the marketplace. Today, its a tighter market. [Many] consulting companies are happy to talk about some type of corporate alignment or strategic relationship, where we bring those consultants into PeopleSoft. Some areas wed consider [are] CRM and e-commerce consulting. A year and a half ago, you couldnt touch those types of firms. Sapient, Viant—all those types of companies—were all incredibly high-valued. That has all changed. Some of these smaller firms look at Peoplesoft as a very attractive way to align themselves.

SP: So, will you acquire consulting firms or ink partnerships with them?

Conway: One of my five objectives in 2001 for PeopleSoft is to establish an omnipresent footprint in the industry. We want to surround the market with partners and alliances and agreements that make Peoplesoft a standard anywhere you look. Theres no one path to achieve that directive. We can acquire companies, we can have strategic initiatives with others in particular vertical markets, we can do revenue sharing.

The watchwords with partnerships are staying flexible and creative. Were pretty much open to anything.

SP: Fifty percent of your Q4 revenue came from new customers. Did any of those new customers unplug software from Oracle, SAP or Siebel?

Conway: The answer is surprisingly yes. Its very unusual for a company to unplug one of its enterprise apps, no matter how unhappy they are with the vendor. You can be upset with SAP or Oracle, but it costs money to pull it out. But the trend to Internet-enable your enterprise apps involves spending money, even if you stay with the same vendor. Now, the customer starts to ask how much it will cost to jump ship and switch to us. We had 10 or 12 accounts in the last 60 days that actually unplugged a competitive product. I have to tell you, that never happens in our industry. Once youve done a $5 million or $10 million implementation of SAP, you are not going to unplug it. Thats how SAP survives. Theyre not leading in innovation, but they have 27,000 installations, 13,000 customers—its painful to switch.