At Trial, Oracle Tells of Microsoft-SAP Bid

Oracle Corp. on Monday defended its $7.7-billion hostile takeover bid for rival business-applications software maker PeopleSoft Inc. by revealing in federal court here that Microsoft Corp. had tried to buy SAP, the No. 1 company in that market.

The surprising disclosure by Oracle attorney Daniel Wall provided a dramatic opening for the antitrust trial, which pits one of Silicon Valley’s brashest companies against federal and state regulators who charge that an Oracle-PeopleSoft combination would lead to higher prices and fewer choices for customers.

Wall said Microsoft began its pursuit of SAP last June, the day after Redwood City, Calif.-based Oracle announced its unsolicited bid for PeopleSoft. He said Microsoft’s move showed how quickly the business software market could adjust to new conditions.

Microsoft confirmed in a statement Monday that it had held preliminary talks to buy SAP of Germany. Microsoft said the effort ended months ago because of the complexity of such a deal, which would have been by far the largest in the history of the Redmond, Wash.-based software behemoth. SAP confirmed Microsoft’s version of events in a separate statement.

In court, Wall argued that regulators at the Justice Department had defined the business software market too narrowly in its antitrust lawsuit against Oracle. The regulators want to block Oracle’s bid on the grounds that if it succeeded, the number of top providers of software for financial tasks, including accounting, and for managing employee functions, such as payroll, would shrink from three to two.

“The way they are defining the market, they might block us from buying PeopleSoft but let Microsoft buy SAP,” said Oracle spokesman Jim Finn. “It’s insane.”

Deputy Assistant Atty. Gen. Thomas Barnett said it wasn’t clear whether a Microsoft-SAP deal would have been permitted.

“It’s something we’d obviously look at,” Barnett said after the first day of arguments and testimony in what is expected to be a monthlong trial.

U.S. District Judge Vaughn Walker, a former antitrust lawyer, will decide the case without the aid of a jury.

The case is the biggest test for antitrust regulation of the software industry since the Justice Department sued Microsoft -- and that suit was already echoing through the 17th-floor courtroom before the SAP disclosure.

PeopleSoft is relying on Palo Alto attorney Gary Reback, who helped persuade the federal government to go after Microsoft, to save it from another powerful software maker. Part of Oracle’s defense also resembles Microsoft’s: It says that the software industry is more dynamic than the government realizes, and that new entrants can appear with little warning and shake things up.

Pleasanton, Calif.-based PeopleSoft is not a party in the lawsuit. Its board has rejected four separate Oracle offers and it is clearly siding with the government.

If Oracle were to prevail in court, it would have to persuade a majority of PeopleSoft investors to sell their shares to close the deal.

Oracle earns most of its money by selling database programs but has been branching out by selling applications that run on top of those databases.

In the courtroom Monday, Judge Walker interrupted government trial attorney Claude Scott with a series of questions that signaled some skepticism about how the government had defined the market.

The government says an Oracle-PeopleSoft union would create an unacceptable concentration of market power, which would harm the largest customers in the U.S. Oracle says that geographical boundary is arbitrary, and that the regulators created it because under their own enforcement guidelines, Oracle and PeopleSoft’s worldwide market share wouldn’t be large enough to trigger a lawsuit.

Walker also appeared receptive to Oracle’s argument that the largest customers -- those the government says it needs to protect -- buy the same programs as the mid-market customers. The government’s antitrust officials agree that there is enough competition in that segment of the market.

“There is a certain fluidity, is there not?” Walker asked Scott.

The government’s first two witnesses were the chief information officers of Cox Communications Inc. and a civil engineering firm, CH2M Hill Inc.

The two testified that when shopping for their companies in recent years, they considered their best options for software packages to be Oracle and PeopleSoft. But on cross examination, they conceded that they could have turned to SAP if need be.

Oracle’s Wall focused largely on antitrust legal theory in his opening argument. Among other points, Wall said that two companies could provide just as much price competition as three.

Cox and most other customers soliciting bids typically narrow their choices to two potential providers, or even one, before negotiating prices, Wall said.

He added that it was hard to see why eliminating a contender earlier would make a substantial difference.

Because software costs very little to produce, the competition to win deals is intense -- generating discounts of as much as 80% off the list price, according to one witness Monday.

In Cox’s case, the cable and Internet-access company negotiated price only with Oracle, executive Scott Hatfield testified on cross examination, leaving it unclear what effect there might have been from the absence of PeopleSoft.

Wall also said that many customers turned to outsourcing for human resources functions. Still others decide not to upgrade for years, he added.

“We see the Department of Justice case as essentially anecdotal and vignette-driven,” Wall said, setting up what could be crucial testimony between warring economists.

Investors apparently decided it was too early to take sides in the case and bid up shares of both companies in Nasdaq trading Monday. Oracle stock rose 38 cents to $11.42, while PeopleSoft gained $1.15 to $18.46. Oracle’s latest bid values PeopleSoft at $21 a share.

As for Microsoft’s aborted SAP bid, it provided an unexpected answer to investor criticism about slowing growth at the world’s largest software company. Most analysts had expected the company to raise its dividend to return more cash to shareholders, not to buy such a big firm. Based in Walldorf, SAP had $8.6 billion in revenue last year and has a stock market valuation of about $49 billion.

But Microsoft has begun selling business software to smaller companies, and some industry observers said the addition of software aimed at major corporations would help Microsoft win broader acceptance of its framework for conducting more transactions over the Internet.

Such software could boost that architecture in the same way that Microsoft’s Office suite of word-processing and other programs has helped the company keep its monopoly on operating systems for personal computers.

Microsoft has already made two acquisitions to gain a foothold in the business-software market, spending $1.1 billion for Great Plains Software in 2000 and $1.5 billion to buy Navision of Denmark in 2002.