Oracle Trumps PeopleSoft in Tender Offer Battle

Analysis of News Events
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Last week, Oracle Corporation made an announcement that many PeopleSoft customers hoped they would never hear. After more than a year of financial and legal wrangling, Oracle declared that it had convinced PeopleSoft's shareholders to tender almost 61% of the company's common stock at a price of $24 per share. While the event does not end the struggle between the two software vendors, it does signal that an end is in sight. It also signals the beginning of some difficult decisions for PeopleSoft's customers, especially those who run that software on IBM's middleware and servers.

Though PeopleSoft's shareholders have placed a majority of their holdings on the table for Oracle to buy, there is a financial obstacle that prevents the company from doing so. That is PeopleSoft's poison pill defense, a mechanism that will flood the market with millions of new shares if Oracle initiates a purchase. After announcing the success of its tender offer, Oracle once again asked PeopleSoft's Board of Directors to drop the poison pill defense. However, as this article goes to press, PeopleSoft's Board of Directors is still refusing to do so.

According to a statement from PeopleSoft's board, the group believes that a majority of shareholders still agree with it that Oracle's $24 per share offer is inadequate and does not reflect the company's true value. The besieged firm also said that it will demonstrate its superior value to shareholders over the coming months. This may mean that PeopleSoft will mount a fight to win back the tendered shares. Should it do so, it will also fight to get the proxy votes it would need to defend its actions at PeopleSoft's next annual shareholder meeting, an event that is scheduled for March of next year. If that meeting takes place, Oracle would force a vote to drop the poison pill defense.

While Oracle is undoubtedly ready for such a proxy battle, it hopes to have the legal system remove PeopleSoft's last defense at a much earlier date. At the time of this writing, the two software vendors are due to meet on November 24 in the Delaware Chancery Court, where a judge may rule on Oracle's request that PeopleSoft be forced to drop its poison pill. It is rare for a judge--particularly one from Delaware--to force such a decision on any company. However, it is possible that Vice Chancellor Leo Stine will do so now that Oracle's tender offer has garnered a majority of PeopleSoft's shares. It Stine makes that decision, nothing will stand in the way of Oracle's hostile takeover.

Preparing for Change

With an Oracle takeover looking more likely by the day, PeopleSoft customers are increasingly considering their options in a post-merger environment. That environment would be especially difficult for PeopleSoft's World customers, as they rely on middleware from IBM that directly competes with Oracle's products. Life would also be tough for most EnterpriseOne users, though a significant percentage of them use Oracle's database management system. Still, a recent survey by AMR Research indicates that users of both product suites hold a dim view of what their world would be like under Oracle. In the study, 47% of the respondents said that they expect Oracle would offer no new functionality for their software, while another 17% said they would expect minimal enhancements. In addition, 63% of the respondents said that if Oracle were to stop enhancing their products, they would immediately cancel their maintenance contracts. The group stated that they would do so as long as they could find third-party support at half the price of their current maintenance charges.

As these findings demonstrate, Oracle would have to work hard to reassure customers of its ongoing support. If it failed to do so, many firms would pull the plugs on their maintenance contracts and leave Oracle with hundreds of millions of dollars in lost revenues. There is also little doubt that one or more firms would step forward with services to support the disaffected customers. Indeed, Texas-based TomorrowNow already offers such services for PeopleSoft's Enterprise users. Other firms may soon offer similar services for World and EnterpriseOne customers.

In short, while the outlook for the Oracle acquisition is not entirely clear, it is time for PeopleSoft customers to think through the choices they will make under a new owner. It is also time for those customers to contact Oracle--if they have not done so already--and let the vendor know how its behavior will affect their choices. While such actions may not change Oracle's policies, they will prepare customers for a support environment that could soon be quite different from the one they have today.

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology. You can reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..