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Insight interview – Wake up Call

“We announced the JD Edwards acquisition on the morning of Monday, 2 June, this year. I had spent weeks and weeks on due diligence, working nights and weekends. I clearly remember being with my wife for dinner for the first time in a month on the Thursday night after the announcement. I spent the whole evening explaining how sorry I was for all the work I was doing and promised it would slow down from that point. At 4:30 the next morning, when the Oracle bid came in, the phones started ringing.”

Kevin Parker, CFO of PeopleSoft, hasn’t had it easy recently. The announcement of its $2bn acquisition of mid-market software vendor JD Edwards made the combined company the second-largest financial software vendor in terms of market share in the world. Oracle, whose number-two position PeopleSoft had usurped, struck back with a $16 per share hostile bid for PeopleSoft, later upping its offer to $19.50 per share, valuing the company at over $6bn.

“When the top five or so software companies in the world account for 125% of total industry profit, you understand the need to make it into the top rank,” Parker says. “An increase in market share tends to generate more market share as you gain exposure. It is self-perpetuating.

“Oracle was trying to use the capital markets to achieve a goal its products could not. They were losing market share, and its licensing revenues from applications fell by 30% in the last couple of years.”

PeopleSoft hasn’t been immune to the downturn, either. Its revenues fell by 20% from 2001 to 2002. But the company has turned itself around in the last few years. Whereas it was once a tenth the size of market leader SAP, it is now only a quarter the size of the German giant. Parker’s goal is to close the gap further by integrating PeopleSoft and JD Edwards successfully, and to shore up its defences against further attacks from hostile bidders.

Parker already had a ‘poison pill’ in place to protect against takeovers – a shareholder rights plan that gives the board the right to issue preferred shares and determine the rights and designation of those shares without shareholder approval. A customer assurance plan also requires an acquirer to compensate PeopleSoft customers in the event of a takeover.

“Poison pills are effective defence mechanisms. The only time they are overturned by the courts is when a board is found to not have acted consistently with its fiduciary responsibility. Our board has set up an independent team to evaluate the offer. It is above reproach.”

Oracle disagreed, filing a legal suit against the PeopleSoft management team. But Parker says that instead of twisting the knife into PeopleSoft further, Oracle misjudged the reaction of its shareholders and customers, and Oracle’s efforts to throw the JD Edwards deal off-track failed.

Parker argues that Oracle came out too aggressively and PeopleSoft customers rallied against the attack. “I believe they (Oracle) have tarnished their own reputation,” says Parker. “From the outset, they came out strongly saying they would shut (us) down, lay off thousands of employees and transfer all our customers to the Oracle product line. Customers don’t want that – they want choice.” Oracle has since announced that, if successful, it would support the PeopleSoft product line for at least 10 years.

Now Parker is focused on combining JD Edwards and PeopleSoft quickly, without upsetting customers. And, as he is responsible for human resources, IT and legal affairs as well as finance, he is at the centre of the integration.

“The only pressure we face is generated internally. We have to deliver on our plan,” he says.

But Parker has come under pressure to announce cost-savings above the $75m he promised when the deal was announced, even though he says the new figures of between $150m and $200m in savings were always expected.

“I felt we should have a lower estimate to begin with that could be refined as the deal unfolded.”

Many suspect that market pressure and the looming figure of Oracle forced Parker to make promises he would rather not have to try to keep; he, in turn, strenuously denies this. “We didn’t just get smarter overnight. We have layers and layers of plans and analysis.”

Parker must now prove the sceptics wrong, especially the bears on Wall Street. “Conventional wisdom says our customers will stop buying, we will lose employees and our business will be ruined. Conventional wisdom is wrong.

“We mustn’t let this opportunity pass us by. When I wake up in the morning, it is still dark, but the only thing on my mind is the integration.”

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