Oracle Wins Battle to Buy PeopleSoft

The board of PeopleSoft Inc. on Monday bowed to its investors -- and to one of the most aggressive executives in Silicon Valley -- by agreeing to sell the company to Oracle Corp. for $10.3 billion.

The deal caps a bitter, often personal 18-month fight that captivated Wall Street and Silicon Valley, even though few casual computer users know much about either company’s products.

Monday’s agreement was reached over the weekend, during the first direct negotiations between Oracle and PeopleSoft. The talks convened after PeopleSoft asked Oracle to raise its previous “best and final offer” by $2.50 a share, to $26.50 -- a 10.6% premium over PeopleSoft’s Friday closing price of $23.95.

PeopleSoft’s concession heads off a court fight over its anti-takeover provisions. In November, 60% of PeopleSoft shareholders agreed to sell to Oracle for $24 a share, but the board threatened to block a sale by flooding the market with additional shares.

After the purchase closes next month, database maker Oracle will become one of the largest producers of the software that powers back-office functions for large corporations, allowing it to compete against market leader SAP.

But the business aspects of the deal were overshadowed during PeopleSoft’s struggle by the sniping between former PeopleSoft Chief Executive Craig Conway and Oracle founder and CEO Larry Ellison, a flamboyant executive unaccustomed to losing.

Conway, who was ousted in October, was a former Oracle executive and an Ellison protege -- before he likened Ellison to Mongolian warlord Genghis Khan.

In a letter to PeopleSoft employees Monday, company founder Dave Duffield struck a more diplomatic tone, but his disappointment was clear.

“I offer my sincere apologies for not figuring out a different conclusion,” wrote Duffield, who started the company in 1987 and returned as CEO after Conway was sacked.

Employees said Duffield’s sentiments reflected the mood at Pleasanton, Calif.-based PeopleSoft.

“A lot of people are upset, but it’s a unifier,” one worker said. “There’s a unity in defeat.”

In launching his June 2003 bid, Ellison shrugged off the software industry’s historic aversion to hostile takeovers. He kept fighting even after the federal government sued to block the deal.

The 60-year-old billionaire shifted part of his rationale for the deal over time but still hammered away with high-priced legal and Wall Street talent. By belittling PeopleSoft’s prospects while raising his offer, he left many shareholders -- and eventually the PeopleSoft board -- seeing no other way out.

“It’s an all-is-fair-in-love-and-war approach to acquisitions,” said analyst Tad Piper of Piper Jaffray & Co. “The aggressive rhetoric is very much a part of the style.”

For Ellison, winning PeopleSoft was a matter not just of ego but of long-term survival.

Redwood City, Calif.-based Oracle gets most of its revenue by selling database programs that house large amounts of information. It and IBM Corp. are close rivals in that field, and they face pressure from Microsoft Corp. and others at the lower end of the market.

To broaden its portfolio, Oracle has tried with mixed results to sell more business programs that run on top of databases and manage payroll, billing and other corporate functions. Ellison wanted to add PeopleSoft’s much larger set of business programs to compete better with Germany’s SAP.

With the addition of PeopleSoft, Ellison said on a conference call with analysts, Oracle would double its customer base to become the top seller of business programs in North America and in such sectors as retail banking.

“It’s going to give us real strength in specific industries,” Ellison said, and Oracle will be able to invest more in research and development.

In testimony as Oracle defeated a Justice Department lawsuit to block the merger on antitrust grounds, Ellison predicted the demise of an independent PeopleSoft and other specialty firms that solve only one business problem or another. He said that over time, many large customers would become dependent on multiple products from Microsoft or those cobbled together by IBM, and that Oracle needed to expand to survive.

“He’s right -- the enterprise software sector is maturing,” said stock analyst David Hilal of Friedman, Billings, Ramsey & Co. “Whenever anything matures, there’s always a consolidation.”

PeopleSoft put up a tremendous fight, in part because the corporate cultures of the firms are so different.

While PeopleSoft has long been known for collegiality, Ellison fostered a sales-driven climate of fierce internal competition. A onetime Oracle executive, Conway found a refuge as the head of PeopleSoft, and he opposed a merger with his former employer at any price.

Conway lost his job late in the battle, when testimony showed that he had understated the harsh effect of the fight on PeopleSoft’s business.

PeopleSoft lobbied for the Justice Department lawsuit and filed its own suit for unfair trade practices in Alameda County. The company rejected numerous versions of Oracle’s bid, and refused to revoke its “poison pill” takeover defense, which could have kept Oracle from acquiring a majority of PeopleSoft shares.

The two sides had been scheduled to return Monday to a Delaware court, where Oracle planned to argue that PeopleSoft was thwarting the wishes of its investors and delaying the inevitable -- the ouster of PeopleSoft’s board at its next annual meeting.

Instead, a PeopleSoft board committee of outside directors authorized a lawyer to call Oracle late last week and suggest a price of $26.50.

“PeopleSoft saw the writing on the wall, and it became a game of chess, with them trying to figure out how to get the best price,” Hilal said.

Ellison said Oracle agreed to pay more after PeopleSoft provided new details that underscored the strength and high profitability of its contracts with customers for maintaining software they had purchased.

“It was a more profitable business than the assumptions we made,” Ellison said. He said the acquisition should begin adding to Oracle’s profit in the fiscal fourth quarter.

Oracle also reported its second-quarter results Monday, saying that net income jumped 32% to $815 million as sales rose 10%. Sales of business programs rose 58% from a year earlier.

“It was a good quarter, not a great quarter,” said analyst Charles Di Bona of Sanford C. Bernstein & Co.

PeopleSoft shares rose $2.47 to $26.42 on the takeover news, while Oracle increased $1.35 to $14.63. Both trade on Nasdaq.

Conway may have been the takeover battle’s first casualty, but he won’t be the last. Oracle documents presented in court showed that the company contemplated cutting 6,000 of PeopleSoft’s 11,250 jobs.

Executives later portrayed that as a worst-case scenario. On Monday, Oracle executives said they might cut $150 million or more of PeopleSoft’s annual research and development budget. Sales, marketing and administration will also take substantial hits.

Although Ellison set out to eliminate a competitor and its products, he has since pledged to produce another full version of PeopleSoft’s flagship program before shifting customers to a combined system.

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At a glance

Oracle Corp.

Oracle, the largest business software company in the world, is known for its database software.

Headquarters: Redwood City, Calif.

Founded: 1977

Employees: 42,000

(as of May 2004)

2003 revenue: $10.16 billion

2003 net income: $2.68 billion

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PeopleSoft Inc.

PeopleSoft makes sophisticated software that manages the back-office functions of large corporations. Its 12,000 customers are in more than 24 industries, including manufacturing, financial services, healthcare and government.

Headquarters: Pleasanton, Calif.

Founded: 1987

Employees: 11,250

2003 revenue: $2.27 billion

2003 net income: $85 million

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Los Angeles Times