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As deadline nears, opinions weigh on side of failure for Oracle

Mark Brunelli, News Director

Industry analysts said a failed takeover of PeopleSoft Inc. could mean new life for the struggling developer of enterprise applications. But don't expect an end to the courtroom drama just yet.

Oracle Corp.'s 17-month-old takeover bid may be coming to an end as soon as tomorrow, when PeopleSoft shareholders vote on whether to tender their shares to Oracle Corp. for $24 each. If the takeover fails and Oracle decides to walk away, analysts said PeopleSoft can expect falling stock prices in the short term and a significant amount of new business in the long term.

"I think you'll see a lot of PeopleSoft customers activating their plans to buy PeopleSoft applications and upgrade PeopleSoft applications that they're running," said Mike Dominy, a senior analyst with Boston-based Yankee Group. "I think that would give PeopleSoft a real shot in the arm in a real positive way."

If it succeeds, analysts predict few changes for users in the short term, but reduced development on competing products in the long term.

Either way, litigation is likely to continue for some time. Oracle has already filed suit seeking to end PeopleSoft's "customer assurance program," a guarantee to give new PeopleSoft customers four times their money back in the event of a buyout. The suit also seeks to invalidate PeopleSoft's "poison pill" antitakeover provision, which, if activated, would flood the market with new shares of PeopleSoft stock, making a hostile takeover extremely expensive.

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And should the takeover fail, analysts predict that PeopleSoft will sue Oracle for alleged damage to PeopleSoft's reputation from the long battle. PeopleSoft has already indicated plans to go forward with such a lawsuit.

"I think PeopleSoft is going to have a really strong case when they sue," Dominy said. PeopleSoft will allege that "Oracle's entire intent was to damage them as a competitor, not to actually go through with the acquisition."

Industry analysts said they were fairly confident that the deal would not go through, but acknowledged that anything could happen in the end.

"I tend to think that it has a chance of going though," said Rob Kidd, a research director with Union City, Calif.-based Sageza Group, Inc., a market research and strategy firm. "But if I was to bet on it, I would probably stake my bet on the fact that it's not."

Kidd said he leans toward betting against the acquisition because Oracle has sent strong signals that it would walk away given a "no" vote. Also, Kidd said, dragging out the battle any further could be too costly for Oracle, both in terms of money and damage to its reputation.

"There may be some other companies that [Oracle is] eyeing," Kidd said. "They might take a little more work and they might be in a slightly different market, but they could be fruitful and be lower risk and not cost the company as much."

PeopleSoft's board of directors unanimously rejected Oracle's "best and final" offer last week, putting the takeover squarely in the hands of shareholders. At last check, at least two of PeopleSoft's biggest shareholders were split on the question of whether to tender their shares. Private Capital Management, which owns a 9.3% stake in PeopleSoft, turned down Oracle's bid in documents filed with the Securities and Exchange Commission.

Alternatively, Capital Guardian Trust Co. has indicated plans to tender its 37 million PeopleSoft shares, which account for about 10.2% of the outstanding stock.

Hypothetically speaking …

If Oracle is successful in its takeover bid, current PeopleSoft customers most likely will not notice any immediate changes in their service, according to analysts.

"There is a fair degree of autonomy that would be allotted to PeopleSoft and the customers would not substantially be affected directly," Kidd said.

"I don't think you'll see a cut in support for PeopleSoft users," Dominy said. "I also don't think you'll see significant development activities that hadn't already been planned and in the pipeline within PeopleSoft's research and development organization."

A merged Oracle/PeopleSoft would also mean a slowing of innovation around PeopleSoft's enterprise resource planning and customer relationship management applications, as those are areas in which Oracle competes, Dominy added.

Confidence, amid turmoil

Throughout the long courtroom battle with Oracle, both companies have seen their stock prices plummet, while the shares of their biggest rival, German-based SAP AG, have risen.

Despite the stock fluctuations, PeopleSoft has reported that since the beginning of the year it has generated $422 million in license revenue and has added 418 new license customers.

One of those companies is American Pad and Paper (Ampad). The Plano, Texas-based manufacturer, which employs about 1,200 people, had originally been a customer of J.D. Edwards before that company was acquired by PeopleSoft.

Ampad had licensed J.D. Edwards' World ERP product, but let that service agreement expire about three years ago. After the acquisition, Ampad decided to resign with PeopleSoft.

"There was no value-add to stay with J.D. Edwards on a maintenance agreement because they were not doing anything with the product," said Brad Istas, Ampad's CIO. "Then PeopleSoft basically injected new life into the World product."

Ampad signed the new contract with PeopleSoft during the first fiscal quarter of 2004. Istas said his company was attracted to the fact that PeopleSoft displayed a "culture of listening" that was not present during the J.D. Edwards days.

Today, the World product, which was recently refreshed by PeopleSoft, touches every part of Ampad's business, including manufacturing control, accounts payable, accounts receivable, purchasing, sales order processing and inventory control.

Asked if his company was apprehensive about signing the agreement with PeopleSoft given the possible takeover, Istas said his company had some protections built into the contract just in case, though he didn't offer specifics.

Although Istas said he is fairly confident that Oracle's takeover bid will fail, he acknowledged that he is not a fortune teller.

"From what I've seen, I don't think it's going to go through," Istas said. "But [opinions] are just like noses. Everyone's got one."

MORE ON THIS TOPIC:

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