For Oracle, Winning a War May Be Only Half the Battle

It may have won majority support from PeopleSoft Inc. shareholders for its acquisition bid, but Oracle Corp. faces more than a few obstacles in its quest, including a court fight or two.

Even if Oracle scales the hurdles, analysts said over the weekend, it will be presented with a greater problem -- having to digest its catch.

Oracle has never made an acquisition in the super-sized category of PeopleSoft, and there are no guarantees that the Redwood City, Calif., company could handle it, analysts said.

“We’ve never seen them do it,” said Brendan Barnicle with Pacific Crest Securities. “There’s a lot we don’t know.”

The PeopleSoft board on Saturday rejected the $24-a-share offer, saying it did not believe that most of its shareholders would be happy with it. Late Friday, Oracle had said investors holding about 60% of PeopleSoft’s stock had tendered their shares in favor of the deal.

Shares of PeopleSoft closed up 25 cents Friday at $23.17, and Oracle slipped 22 cents to $12.75. Both are listed on Nasdaq.

This week, Oracle will ask a Delaware Chancery Court judge to strike down PeopleSoft’s “poison pill” anti-takeover defense that makes a hostile acquisition prohibitively expensive. If the judge does not comply, Oracle could stage a proxy fight at PeopleSoft’s annual meeting.

Even when it is friendly, the marriage of two large companies is a complicated undertaking. That is especially true in technology. In addition to the universal concerns about disparate cultures and assets, tech firms have to worry more about ensuring that their products work together and about keeping customers that are loyal to one line of software or gadget.

Those issues loomed so large for Hewlett-Packard Co. after its 2002 purchase of Compaq Computer Corp. that many in the industry still have not decided whether the acquisition was successful -- and that union was one sought by both sides.

Oracle’s 17-month pursuit of Pleasanton, Calif.-based PeopleSoft, by contrast, has had all the mutual affection of a Hatfield and McCoy co-production.

Oracle primarily sells databases for storing corporate data, and it covets the programs that PeopleSoft makes for managing payrolls and other business tasks. Oracle Chief Executive Larry Ellison launched the attack just days after PeopleSoft said it was buying another software firm, J.D. Edwards & Co. And in doing so, he essentially crashed the party being thrown by his former protege at Oracle, PeopleSoft CEO Craig Conway.

The initial offering of $16 a share was so little above where PeopleSoft’s stock was trading that many thought Ellison was acting from spite. Conway made matters worse by saying, without any suggestion of what might constitute a reasonable price, that he could not imagine a deal to unite the companies.

The sniping has alienated customers and hurt the performance of both companies, said analyst David Hilal of Friedman, Billings, Ramsey & Co. “This will be a great Harvard business case of what not to do.”

Hostile takeovers, even those a lot less hostile than this one, are nearly unheard of in software. That’s because the chief asset of the target company is usually the engineers and other staffers who can simply walk out the door.

“In software, the people aspect of the integration is the most important part. And these are clearly two camps who don’t like each other,” said Piper Jaffray & Co. analyst Tad Piper.

Oracle has said that it plans to eliminate as many as 6,000 jobs, more than half of those now on PeopleSoft’s payroll.

What Oracle really wants, its executives have said, is PeopleSoft’s customers, especially those that pay yearly maintenance fees requiring fairly little work by the company.

Oracle says it needs the critical mass to fund new products and take on the No. 1 supplier of business software applications, SAP of Germany. If it can’t prevail in that fight, Ellison believes, Oracle will have little chance against the biggest technology powers on the planet, Microsoft Corp. and IBM Corp., both of which compete with Oracle in its core database business.

But many of PeopleSoft’s customers -- even those that run PeopleSoft applications on top of Oracle databases -- don’t want to turn into all-Oracle shops. They have been unimpressed by the parade of Oracle positions on the future of PeopleSoft products.

The company first said it would stop selling those applications, then said it would keep them. Most recently, Oracle has been saying it would not only keep selling and supporting them but would even introduce one more generation of PeopleSoft’s main suite of programs. Reluctant to take anything Oracle or Ellison says at face value, some PeopleSoft customers have already defected to other companies, in particular SAP.

Confusion over which products would survive “has impacted both companies quite significantly,” said analyst John Torrey of Adams Harkness Inc. The piece of Oracle’s business that overlaps with PeopleSoft’s has been in “a steady state of decline for almost two years,” he said.

And in waging its defense against Oracle, PeopleSoft has made the problem worse, some analysts said. PeopleSoft has been so eager to show sales growth and demonstrate its viability as an independent firm that it has been offering eye- popping bargains, according to a continuing Delaware suit filed by Oracle.

Those deals are sucking away sales that PeopleSoft, or Oracle, should have been able to expect next year, said George Gilbert, a consultant with Tech Strategy Partners.

That does not bode well for a combination that is already getting off on the wrongest of feet.

“Even if they combine,” Gilbert said, “PeopleSoft will have mortgaged its future, and Oracle still won’t have a viable business.”