Oracle Paid Real Money to Land PeopleSoft

“A billion here, a billion there, pretty soon it adds up to real money.” Thats one of the better known bon mots from the late Everett Dirksen, the famously puckish U.S. senator, when he was talking about the federal government budget deficits in the 1960s.

Well it took a billion more here and there before Oracle presented PeopleSoft with the offer that it couldnt refuse. The final price was $10.3 billion, double Oracles original $5 billion offer in June 2003. Oracle had to repeatedly sweeten the offer from $16 before it made what it claimed was its “best and final offer” of $24 per share in November.

The final price tag is just one of the many concessions that Oracle had to make over the past 18 months before it cajoled PeopleSoft to yield in one of the more prolonged and bruising hostile buyouts in recent memory.

Oracle might have closed this deal months sooner if it hadnt confronted PeopleSoft with a lowball bid of $16 per share along with the arrogant declarations that Oracle would apply a scorched earth policy to the PeopleSoft product line. Oracles initial statements, CEO Larry Ellisons protestations at last weeks OpenWorld conference notwithstanding, indicated that the company was mainly buying PeopleSoft for its customer base.

/zimages/3/28571.gifClick hereto read why Wall Street is giving a thumbs up to the deal.

Those statements also indicated that PeopleSofts ERP (enterprise resource planning) product line would receive minimal support, although Oracle later made a seemingly grudging concession to support the PeopleSoft products for 10 more years. But that didnt tell customers whether they could expect to receive any significant upgrades during those 10 years.

It wasnt until last week that Ellison and other Oracle executives made the clearest public statements to date that the company is going to complete the development of PeopleSoft 9 and even Version 6 of the former J.D. Edwards World product line. Only then did customers and PeopleSoft management have serious hope that their technology investments had some semblance of a 10-year life expectancy.

/zimages/3/28571.gifClick hereto read about Oracles rapid transition plans for the combined companies.

Its very likely those statements helped convince PeopleSofts leadership that they finally had a firm basis to reach an agreement. PeopleSoft founder Dave Duffield and other longtime employees certainly needed to hear some assurance that the software assets they had developed over the past 17 years would not be scrapped.

The extra $2.50 cents that PeopleSoft requested to bring the total offer to $26.50 was likely a final face-saving demand to show that PeopleSoft retained its independence and control of its fate to the end.

In a telephone news conference on Tuesday, Oracle co-President Charles Phillips acknowledged that his company is getting some significant technology benefits for its money.

“PeopleSoft had a substantial presence in financial services and its a strategic vertical for us as well,” Phillips said. “One of the reasons for the merger was to get more critical mass in selected verticals,” and financial services was one of those, he said.

Next Page: What Oracle gets for $10.3 billion.

Getting its moneys worth

PeopleSoft is also prominent in federal, state and local government sectors as well as in higher education, Phillips noted.

/zimages/3/28571.gifTo read what PeopleSoft customers think about the buyout,click here.

“But in one area, federal payroll, which we do not have, we will pick up with PeopleSoft,” he said. “That may be an exception where their product is the lead” in a converged Oracle and PeopleSoft product line.

Phillips also stood by earlier statements that Oracle will continue to acquire other companies to fill out its product line. The market for ERP software isnt expected to grow significantly in 2005, and that is why it is ripe for consolidation, Phillips said.

“In the short term we probably are not looking at anything big. We want to make sure that this one works well and demonstrate that to our shareholders,” he said. “Thats not to say that we couldnt do something smaller in the short term.”

In the meantime, Phillips said it will take “at least a couple of quarters to produce the accretion to earnings that we have promised investors.”

Phillips couldnt offer an estimate of how many employees will be let go as a result of the consolidations. “Obviously there will have to be some rationalization. But I dont have a hard number for you at this time,” he said. “We are still evaluating things and going through that analysis as we speak.”

“We are more interested in keeping more of the developers and the support organization and a lot less of the administrative areas,” he said.

So its not just Oracle that will be paying the price for its business victory. As is inevitable in any industry consolidation, there will be a lot of people in northern California who are going to be looking for news jobs or, in some cases, new careers.

There are likely to be some bumps in the road as Oracle works to absorb the company that resisted it so tenaciously for the past 18 months. The process is costly, and not the least of the costs will be what it pays to displace the hundreds of PeopleSoft employees who dont fit into the new structure.

In closing Tuesdays press conference, Phillips observed that Oracle will likely be talking to the press about the results of the PeopleSoft buyout for years to come.

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