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Thursday, November 11, 2004

Possible outcomes of Oracle's takeover bid for PeopleSoft

It appears that, in eight days, we'll know the likely outcome of Oracle's fight for PeopleSoft. Earlier this month Oracle raised its tender offer to PeopleSoft to $24 per share, from $21, and said that $24 was its best and final offer. PeopleSoft's board rejected it. Now this week Oracle is appealing directly to shareholders, saying that if 50% of PeopleSoft shares are not tendered by November 19, Oracle will walk away.

What happens if Oracle walks?
My prediction is that there will be an initial drop in PeopleSoft share price as the immediate prospect of a buyout at $24 disappears, followed by an increase over the next twelve months as PeopleSoft's business gradually improves. In spite of PeopleSoft's earlier claims to the contrary, the threat of an Oracle takeover has been a huge impediment to PeopleSoft license sales. I believe that once the uncertainty about PeopleSoft's future is resolved, there will be a better than expected increase in PeopleSoft license sales. It may take two or three quarters to materialize, as PeopleSoft is put back on short lists, but I think it will be the vendor comeback story of 2005.

If Oracle walks away, however, there is still the open matter of PeopleSoft's lawsuit in California against Oracle for unfair business practices. I'm not a lawyer, but my layman's opinion is that PeopleSoft has a legitimate claim that Oracle deliberately set out to damage PeopleSoft's business, which would be an "unfair" business practice in California. I base this opinion on evidence introduced in the Delaware lawsuit. See my post earlier entitled, "Oracle confidential information released by court", to see some examples. PeopleSoft is suing Oracle for $1 billion, plus punitive damages, and the case is scheduled to go to trial before a jury in Oakland on January 10, 2005. Now, that will be interesting. Be ready to see more of the dark underbelly of software vendor sales tactics.

What happens if Oracle wins?
First, it won't be over on November 19, because Oracle still needs a favorable ruling in the Delaware case. However, let's assume that Oracle is successful there as well and that Oracle takes over PeopleSoft. My prediction is that the impact on PeopleSoft customers will be non-existent. More than anything, Oracle is buying the PeopleSoft's customer base, not its software. Oracle may be aggressive, but it's not stupid. Oracle will not do anything to alienate PeopleSoft customers, even if it succeeds in nullifying PeopleSoft's customer assurance program.

I'm going to go out on a limb here and make a second prediction that Oracle will quickly spin off the PeopleSoft Enterprise One and World product lines (formerly J.D. Edwards). The bulk of the former JDE's customers are on the IBM iSeries platform (formerly AS/400), and Oracle will have zero interest in maintaining that platform. Selling off that product line will give Oracle some cash back on the deal and fund other acquisitions (e.g. BEA?) that are more strategic to Oracle.

If Oracle were to sell off the JDE product lines, who would be the buyer? I don't think those products could stand on their own as an independent company (i.e. JDE II). The prospective buyer that makes most sense to me is SSA Global. SSA has been gobbling up distressed iSeries ERP vendors, and the JDE products would fit nicely in that portfolio.

If that scenario plays out, remember that you heard it here first.

Update, Nov. 13. PeopleSoft apparently believes that Oracle is likely to succeed in its tender offer: PeopleSoft said earlier this week that it has hired a firm to solicit proxies from shareholders in support of its own slate of directors at its annual meeting next spring, to fight any opposing slate nominated by Oracle. This development means that PeopleSoft's ultimate fate will likely not be known soon. Not a good sign for PeopleSoft license sales.

Related posts
Oracle confidential information released by court
Duffield: PeopleSoft not for sale
Why PeopleSoft fired CEO Conway
Oracle questioning PeopleSoft's revenue recognition policy
Revenue recognition problem in PeopleSoft's refund offer to prospects?

by Frank Scavo, 11/11/2004 08:34:00 AM | permalink | e-mail this!

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