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    Oracle Buyout of PeopleSoft: Illegal or Just Predatory?

    Written by

    John Pallatto
    Published June 18, 2004
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      Its become painfully apparent over the past two weeks of trial testimony that the Department of Justices case against Oracles attempted hostile takeover of PeopleSoft is no slam dunk.

      The DOJ has called witness after witness who have taken the stand to dutifully testify that there are only three viable competitors in the market for ERP (enterprise resource planning) software: Oracle, PeopleSoft and SAP.

      In cross-examination, Oracles lawyers peppered these witnesses with questions and presented evidence demonstrating that the market is a lot more complicated than that.

      For example, PeopleSofts own internal documents and statements from the companys customers show that a number of other major players—not the least of which are Microsoft, Automatic Data Processing and Lawson Software—are fighting vigorously for their slice of the ERP pie.

      Its a fair proposition to argue that the Big Three ERP vendors have the market share and sales revenue to dominate the market. Its more of a stretch to demonstrate that the disappearance through a buyout of one of these three companies will make the market noncompetitive. There is no evidence that SAP and Oracle would collude to control prices.

      The DOJ has to convince U.S. District Judge Vaughn Walker that smaller competitors dont have the features or the application scalability to seriously challenge the Big Three players. Furthermore, the DOJ has to show that the smaller competitors have neither the resources nor the intent to move into the high-end enterprise market dominated by the Big Three.

      Thats exactly what the DOJ is expecting Doug Burgum, Microsoft Business Solutions senior executive, to say when he is called to testify this week about the market positioning for his business unit, which sells accounting, financial management, CRM (customer relationship management) and supply chain management software.

      Microsoft seems to have foreshadowed that testimony with a news release over the past week about its plans for MBS, indicating that it will remain focused on SMBs (small to midsize businesses).

      /zimages/7/123299.jpgClick here to read more about Microsofts plans to build up its business solutions group to serve SMBs.

      Its also clear that Microsoft MBS has a long way to go before it can seriously challenge the Big Three. Microsoft doesnt offer anywhere near the same breadth of applications as the top players. MBS isnt even profitable yet, though Microsoft says it will be by the end of 2004.

      The DOJ may have shot itself in the foot by trying to prove that there is a clearly defined high-end enterprise market that only the Big Three can serve. It is easier for the DOJ to demonstrate that only these three have a comparable range of products, features and performance to serve virtually all of the ERP needs of any enterprise large enough and rich enough to afford them.

      Next Page: Eliminating cutthroat competition.

      Steep Discounts


      If the smaller ERP vendors cant mount a serious competitive challenge, the question becomes whether Oracle and SAP together would have so much market power that they would be able to control prices to the detriment of their corporate customers.

      Thats not likely if Oracle and SAP engage in the kind of cutthroat price discounting that apparently prevails in the market right now. The testimony shows that both Oracle and PeopleSoft were prepared to offer discounts of 40 percent to 60 percent off list prices if thats what it took to win a deal.

      /zimages/7/123299.jpgClick here to read about the steep discounts PeopleSoft offered to win sales from Oracle.

      During the trial this week, Judge Walker questioned Phil Wilmington, PeopleSofts executive vice president, Americas, about how his company could offer such steep discounts and still turn a profit. Wilmington said the factors were lower fixed costs, high margins that prevail in the software industry, continuing maintenance fees and the opportunity to sell additional software after the initial sale.

      The testimony also showed that customers were highly skilled in playing one vendor off against the other to get them to cut prices to the bone. All they had to do to get a still better discount was to hint that a competitor had the upper hand in the negotiations.

      The discount offers would come even when customers were negotiating to expand or upgrade an existing ERP installation. They just had to suggest that they were prepared to shift to a new vendor to keep the discounts coming.

      These factors suggest that it would still be hard for Oracle to control prices even if SAP were the only large competitor left in the market. But it also shows that by eliminating its fiercest competitor, Oracle would win more deals and certainly reduce the discount rates it had to offer customers.

      /zimages/7/123299.jpgClick here to read about PeopleSofts assertion that Oracles takeover bid violates antitrust law because it is predatory.

      Then there is the question of whether the Oracle buyout would be predatory because it wants to buy PeopleSoft to get access to its customers and eliminate it as a competitor. This is the easier case to argue.

      Oracle made it clear when it announced its $7.7 billion tender offer for PeopleSoft that it wasnt interested in PeopleSofts ERP technology. Instead, Oracle would seek to migrate customers to Oracle applications. This is naturally alarming to a customer who may have spent millions of dollars over the past 10 years to install PeopleSoft applications.

      Oracle has tried to assuage such customers fears with promises that it would continue to maintain the PeopleSoft code for 10 years after the buyout. PeopleSoft has argued that that the offer alone is predatory because as long as the deal is on the table, it sows fear and uncertainty that make it harder for PeopleSoft to sell software.

      This certainly looks like a predatory buyout to reduce market competition. But whether its predatory to the point of violating federal antitrust law is the ultimate question that Judge Walker will have to answer.

      /zimages/7/28571.gifCheck out eWEEK.coms Enterprise Applications Center at http://enterpriseapps.eweek.com for the latest news, reviews and analysis about productivity and business solutions.

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      John Pallatto
      John Pallatto
      John Pallatto has been editor in chief of QuinStreet Inc.'s eWEEK.com since October 2012. He has more than 40 years of experience as a professional journalist working at a daily newspaper and computer technology trade journals. He was an eWEEK managing editor from 2009 to 2012. From 2003 to 2007 he covered Enterprise Application Software for eWEEK. From June 2007 to 2008 he was eWEEK’s West Coast news editor. Pallatto was a member of the staff that launched PC Week in March 1984. From 1992 to 1996 he was PC Week’s West Coast Bureau chief. From 1996 to 1998 he was a senior editor with Ziff-Davis Internet Computing Magazine. From 2000 to 2002 Pallatto was West Coast bureau chief with Internet World Magazine. His professional journalism career started at the Hartford Courant daily newspaper where he worked from 1974 to 1983.

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