On 6 June, Oracle launched a hostile bid for PeopleSoft, bidding $5.1bn cash, or $16 a share – a 6% premium on PeopleSoft’s closing price the previous day. PeopleSoft’s share price quickly soared, leaping to $18.40 a share in before-the-bell trading, prompting analysts to conclude that while $16 wasn’t going to do the trick, $20-25 might.
PeopleSoft’s president and chief executive, Craig Conway, quickly responded, describing the offer as “atrociously bad behaviour from a company with a history of atrociously bad behaviour”. Why? Just days earlier, PeopleSoft, the third-largest vendor in the enterprise applications market, had itself announced an acquisition by offering to buy fourth-placed JD Edwards for $1.7bn in shares, making the combined company the second-largest enterprise application company in the world, second only to Germany’s SAP. Oracle, with which PeopleSoft had fought for second place for years, would slip to third place. Hence, Conway’s chagrin. Oracle’s bid for PeopleSoft, he said, was “an attempt to disrupt the acquisition of JD Edwards”.
Oracle’s bid has certainly caused a lot of companies on both sides of the Atlantic to rethink their IT spending plans. “If you’re considering a purchase of JD Edwards or PeopleSoft products, don’t sign a deal until it’s clear whether Oracle’s plans to buy PeopleSoft are serious,” analyst Gartner Group warned clients. Why? While PeopleSoft’s bid for JD Edwards has relatively benign implications for customers, Oracle’s plans were far more worrying. It was feared the JD Edwards bid would be abandoned, and PeopleSoft and its products would be killed off, with Oracle offering an upgrade to its own applications suite.
For PeopleSoft, the war of words couldn’t have come at a worse time.
With its stock price dependent on sales revenues, and customers holding back from signing deals to avoid purchasing a soon-to-be-dead application, the protracted wrangling had the effect of simultaneously making the JD Edwards deal less attractive to its shareholders, while making PeopleSoft itself a softer target for Oracle. As analyst David Dobrin noted, this could nuke PeopleSoft’s Q2 revenues, slashing the share price to $12 – making the initial $16 bid irresistible, never mind the $19.50 bid that Oracle has subsequently tabled. Or, indeed, the even higher offer that Ellison was hinting at as he addressed Oracle customers at a London user conference at the end of June. Despite insisting that the $19.50 bid was “fully valued and fair”, Ellison refused to rule out a higher bid. “Never say never,” he said. Criticising the PeopleSoft board for refusing to consider the bid, he told delegates, “The decision should be made by the people who own the company – the shareholders.”
Words to strike a chill in the heart of any PeopleSoft customer, indeed, leaving as they did the future of their IT strategy and expensive investment in software at the whim of Wall Street traders. But how ever uncomfortable, it’s a sensation they – and customers of many more software vendors – had better get used to. A long-heralded period of consolidation in the software industry is at last underway. “Right now, there are probably five-to-10 times more software companies in our industry than we need,” says Thomas Nies, founder and chief executive of privately held ERP company Cincom Systems in Ohio.
While some of these software firms will disappear, many will be absorbed by larger, more successful companies. “If a company adds enough value and has enough customers, it tends to get acquired rather than go belly-up,” says Laurie Orlov, research director at Forrester Research of Massachusetts.
As if in confirmation, on the same day the Oracle-PeopleSoft bid was launched, Made2Manage Systems, a mid-range company specialising in ERP software for manufacturing companies, announced it was going private in a $30m cash deal funded by venture capitalist firm Battery Ventures. Why?
“Made2Manage has had a long, successful track record, but for a company of this size and scale, it’s hard to attract institutional investors,” says Dave Tabors, a general partner at Battery Ventures.
At around the same time, Invensys announced the sale of Baan for just $135m, a fraction of what it had paid for the software company two years earlier. The buyer was a venture capitalist group led by General Atlantic Partners, which owns SSA Global Technologies, another once-strong ERP player. The plan is to roll Baan together with SSA.
Just such thought processes are now concentrating the minds of top executives in the enterprise application market. For PeopleSoft, the JD Edwards purchase brought three major benefits: credibility among manufacturing businesses where it has faltered; an opportunity to move into the mid-market where again it has struggled for traction; and ongoing revenues from existing customers.
JD Edwards, the plan went, was intended to operate as a wholly owned subsidiary of PeopleSoft, with the product line continuing to be supported and developed. As analyst firm AMR Research pointed out, the huge and loyal installed bases of both companies made for a stable combination, with 11,000 customers, 13,000 employees and an estimated $2.8bn in annual revenue. “You don’t mess with that kind of revenue,” says AMR’s senior vice-president, Jim Shepherd. Unless you’re Oracle’s Larry Ellison, of course.
At first, customers were uniformly appalled at the prospect of their core enterprise systems being abruptly discontinued. In fact, the initial announcement had failed to make clear that this wasn’t quite the case, as Oracle’s vice-president of strategy, Chuck Phillips, made clear in a series of conference calls. Phillips, a former Wall Street analyst covering the enterprise application market, had been hired by Ellison to handle acquisitions. His fingerprints are all over the PeopleSoft deal which, according to Phillips, is the first of several that are in the works.
If successful in its bid, says Phillips, Oracle would support PeopleSoft’s version 7 beyond 2003, the point at which PeopleSoft had planned to cut off support to users who had not upgraded. Version 8 would be supported for at least five years while migration tools are developed to help users switch to the equivalent Oracle e-business suite. Oracle would also offer a like-for-like license credit programme, enabling PeopleSoft users to switch to Oracle applications without paying additional license fees.
All in all, it wasn’t quite the disaster that had first been portrayed.
PeopleSoft fought back. It took steps to accelerate the JD Edwards deal, offering JD Edwards’ shareholders cash as well as stock. This made the PeopleSoft acquisition more attractive to JD Edwards’ shareholders and depleted PeopleSoft’s own $2.2bn cash reserves – lessening its attraction to Oracle.
And despite the existence of a financially based poison pill, the JD Edwards acquisition could prove an effective counter-measure: as late as 25 June, Oracle was still undecided about proceeding with its PeopleSoft bid if that meant acquiring JD Edwards as well.
Whatever the outcome, winners have already emerged – many of which are customers. “(Customers) are getting state-of-the-art software at a good price,” says AMR Research’s Nigel Montgomery.
For SAP, it’s hard to see how the wrangling over PeopleSoft is anything but good news, at least while the dust settles on the market and the process of digesting the various acquisitions is over. If Oracle wins, absorbing PeopleSoft will consume valuable management time, and if it bodges the integration, both Oracle and PeopleSoft customers may jump ship. Some customers will leave the fold regardless, such is Oracle’s reputation.
A harsh judgement, but one made up of a handful of niggles that collectively create a burr which could be big enough to spark a mass exit. “Oracle’s flagship e-business suite lags behind the equivalent SAP applications in terms of functionality,” says Simon Bragg, European research director of ARC Research Group in Bedfordshire.
If Oracle loses? Well, PeopleSoft will be busy absorbing JD Edwards, while potential customers, sobered by the Oracle near-miss, may decide that giving PeopleSoft a wide berth makes good sense.