Analysts cast doubt over Oracle bid

Analysts cast doubt over Oracle bid

In its complaint filed to block Oracle's takeover of PeopleSoft on antitrust grounds, the US Department of Justice cites the words of Oracle's own Chuck Phillips to back its argument that the enterprise applications market has only three top-tier vendors.

Phillips, who is Oracle's co-president, was an influential software industry analyst with Morgan Stanley before leaving in mid-2003 to join Oracle, a company he previously had covered.

The DOJ took advantage of Phillips' past to quote in its complaint, filed in the US District Court in San Francisco, a 2002 report he issued describing the back-office applications market for global companies as one dominated by "an oligopoly comprised of SAP, PeopleSoft, and Oracle".

The DOJ's argument that an Oracle acquisition of PeopleSoft would unacceptably limit industry competition hinges on its contention that only SAP, PeopleSoft and Oracle meet the needs of large companies, for whom robust software and vendor stability is essential.

Oracle is challenging the DOJ's lawsuit, countering that the business applications market is fragmented and far broader than the DOJ recognises.

Since joining Oracle, Phillips has emerged as one of the company's top strategists and an architect of its hostile, $US9.4 billion bid for control of PeopleSoft.

The DOJ, which apparently hopes to hang Oracle with its own rope, reprinted in its complaint a paragraph from his 2002 report said: "The market is down to three viable suppliers who will help re-automate the back office business processes for global enterprises for years to come."

Several analysts covering the enterprise applications market said they agreed with the DOJ's argument that for combined financial and human resources (HR) management software, the PeopleSoft/Oracle/SAP triad dominated the US market.

Seven years ago, when she started tracking business applications, more than 30 vendors fought for large deals, Gartner analyst, Lee Geishecker, said.

But bankruptcies, mergers and acquisitions had thinned the ranks considerably, and companies that wanted to buy HR and financial systems from a single vendor now had few options, she said.

"I don't believe there's as much fragmentation as [Oracle's] argument states," she said.

Forrester Research analyst, Paul Hamerman, also saw the top end of the market as an area served by just three vendors.

"The DOJ looked at narrow areas, by application category, which I tend to agree with," he said.

If Oracle swallowed PeopleSoft, it would have a "very dominant position - even over SAP" in the North American HR/financial management applications market, he said.

In a regulatory filing of a presentation outlining its response to antitrust arguments, Oracle listed Lawson Software and SSA Global Technologies’ Baan unit as companies it competed with that were overlooked by the DOJ.

Once a powerful force in the enterprise resource planning (ERP) market, Baan fell apart following an accounting scandal and came close to bankruptcy before being bought in 2000 by a company that then flipped Baan to a new owner, SSA Global Technologies, last year.

SSA Global Technologies is working to rebuild Baan's capabilities as a full-service ERP provider.

An SSA Global Technologies spokesperson said her company competed regularly against Oracle for deals, and considered it one of Baan's top rivals, along with PeopleSoft, SAP and Intentia International.

A Lawson spokesman did not respond to a request for comment.

Oracle's decision to vocally contest the DOJ's merger opposition may distract attention from, but doesn't eliminate, its real problem: Analysts claim the company faces long odds in actually accomplishing its hostile takeover.

PeopleSoft's management remains firmly opposed to the deal, and can deploy the company's "poison pill" anti-takeover provisions to block an unwanted takeover. Even if Oracle gets around the poison pill - it is challenging the tactic's legality in Delaware's Chancery Court - it still has to convince PeopleSoft's stockholders to tender their shares in favour of Oracle's $26-per-share cash offer. The number willing to do so has steadily dropped since Oracle launched its campaign in June. As of the close of business on Thursday, less than 2 per cent of PeopleSoft's shares had been validly tendered.

"Oracle's chances of success looked slim before, and now they look slimmer," research firm, Ovum, said.

Gartner's Geishecker said her firm was advising clients that it expected PeopleSoft to remain an independent vendor to at least the end of 2005.

Forrester's Hamerman said he told clients not to let Oracle's bid affect their software buying decisions.

"I've been saying for a long time that we didn't expect this to happen, and I think the DOJ's decision makes it all the more unlikely," Hamerman said. "It's almost become obsessive at this point. Oracle would do better to walk away from this thing and focus on their own applications business."

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