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Oracle Wins Antitrust Lawsuit

Analysis of News Events
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On September 9, a federal judge in San Francisco issued a ruling that may affect thousands of iSeries customers for years to come. In the ruling, U.S. District Court Judge Vaughn Walker declared that an acquisition of PeopleSoft by Oracle would not create an anticompetitive market for enterprise software. The ruling set aside the antitrust claims of the U.S. Department of Justice (DOJ) and cleared the way for Oracle to resume a hostile takeover attempt of its software rival. Whether the attempt is successful or not, it will foster further uncertainty and doubt among iSeries customers who use PeopleSoft's applications.

In a 164-page ruling, Walker said the DOJ had failed to prove that the enterprise software market is dominated by just three key players: Oracle, PeopleSoft, and SAP. This argument was the lynchpin of the DOJ case, which contended that an Oracle-PeopleSoft merger would reduce the market to two key players who could set prices at artificially high levels. Walker rejected this argument and endorsed Oracle's depiction of the market as a complex one populated by many vendors that offer viable alternatives to the Big Three. The judge also discounted the testimonies of customers who said they have no alternative but to buy from the dominant vendors. As he stated in his ruling, "The issue is not what solutions the customer would like or prefer.... The issue is what they could do in the event of an anticompetitive price increase by a post-merger Oracle. Although these witnesses speculated on that subject, their speculation was not backed up by serious analysis that they had themselves performed or evidence they presented."

The ink on Walker's ruling was barely dry before Oracle relaunched its takeover attempt. On the day of the ruling, the company asked PeopleSoft's board of directors for a meeting to discuss Oracle's $21 per share offer. The database vendor also appealed directly to PeopleSoft customers through an open letter from Oracle President Charles Phillips. In the letter, Phillips committed Oracle to "supporting and enhancing the existing PeopleSoft product line." He also stated that Oracle would "create an applications product suite that incorporates the best features of both companies' products." Clearly, Phillips was trying to make PeopleSoft users forget earlier statements by Oracle CEO Larry Ellison that the takeover attempt was all about acquiring new customers for his company's E-Business Suite.

What's Next for PeopleSoft?

While Judge Walker's decision deals a severe body blow to PeopleSoft's legal defense, the software vendor has other weapons at its disposal to fend off Oracle. These include the following:

  • A potential DOJ appeal--On the day of the ruling, the DOJ voiced its disappointment in the decision and said it was considering an appeal. If it does appeal, legal proceedings could once again put Oracle's takeover attempt on hold.
  • An antitrust review by the European Commission--The EC has not decided whether it will oppose an Oracle takeover, though it did issue a statement of its objections to the merger back in March. The Commission is delaying its decision until Oracle sends it all of the documents that it requested several months ago.
  • PeopleSoft's poison pill--Should these legal defenses fail, PeopleSoft could use its poison pill provision to flood the stock market with additional shares, thereby raising the cost of acquiring the company to unaffordable levels. Oracle has filed a suit against PeopleSoft to force it to drop the provision; that trial will begin later this month.
  • PeopleSoft's shareholders--If Oracle manages to leap these hurdles, it will still need to get a majority of PeopleSoft's stockholders to tender their shares. Then again, there is a possibility that PeopleSoft's largest institutional shareholders will encourage PeopleSoft to drop its poison pill defense and consider Oracle's offer. If several of the largest shareholders take this position, PeopleSoft's board of directors could find it difficult to maintain its opposition.

Rumors have also been swirling that PeopleSoft may invite other companies to make "white knight" bids that top Oracle's offer. Even if PeopleSoft does invite such bids, I doubt that any vendor will respond with one. The companies that could afford a PeopleSoft acquisition--vendors such as IBM, Microsoft, and Hewlett-Packard--all benefit heavily from their partnerships with PeopleSoft rival SAP. As such, acquiring PeopleSoft would put them in direct competition with a key partner. This means that PeopleSoft's only refuge might be SAP itself, and that combination would face antitrust scrutiny as intense as that facing the Oracle bid.

In short, there are many rounds remaining in the slugfest between Oracle and PeopleSoft. It is not yet clear which of the contenders will be standing when the fight is over. However, the latest developments in this battle do make two things clear. First, enterprise software providers such as SAP, Lawson, SSA Global, and Geac will continue to benefit from the uncertainty over PeopleSoft's future as software buyers look to other firms for solutions. Second, Judge Walker's ruling has given software industry executives a green light to pursue mergers that they may have previously avoided because of antitrust concerns. Ironically, this means that many of the vendors that customers are considering instead of PeopleSoft today may become acquisition targets tomorrow. That should make every company think twice before assuming that any vendor is a safe harbor from the consolidation wave that is washing over the software market.

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..

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology.


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