Judge’s decision means uncertain future for PeopleSoft

NEW YORK – One year ago at PeopleSoft Inc.’s Connect user conference, chief executive officer Craig Conway took the stage to assure several thousand PeopleSoft customers that Oracle Corp.’s then three-month-old bid for control of PeopleSoft had failed. When he stands before the crowd at this year’s Connect gathering later this month, he’ll have a harder time making the case that Oracle’s lingering campaign isn’t harming PeopleSoft.

While Oracle still faces significant obstacles to completion of its intended US$7.7 billion (all figures U.S.) hostile takeover, analysts say Thursday’s court ruling rejecting the U.S. Department of Justice’s attempt to block the deal on antitrust grounds is a blow for PeopleSoft.

“PeopleSoft’s licence sales have been difficult of late, and I think it’s going to continue to be difficult for them to close licence deals,” said Forrester Research Inc. analyst Paul Hamerman. “Basically I am recommending that clients be cautious and consider all the possible scenarios. I think there’s a real possibility here is that if you invest in PeopleSoft products, you may see enhancements and new releases dry up.”

At PeopleSoft’s last Connect show, Conway was able to portray PeopleSoft as a strong company able to shrug off Oracle’s unwanted advances. Shareholders were unimpressed with Oracle’s then-$7.3 billion offer, which represented only a small premium on the trading price of PeopleSoft’s shares. The company had just completed its $1.8 billion acquisition of J.D. Edwards & Co., a process it sped up after Oracle began its pursuit. It was also coming off a respectable quarter, in which sales and revenue exceeded expectations.

But the year since has been a difficult one for PeopleSoft. It missed earnings expectations by a little in its first quarter and then by a lot in its second. The current quarter, which ends Sept. 30, could be equally grim. PeopleSoft hasn’t broken out its revenue from J.D. Edwards in its financial reports for the past year, and analysts say they suspect the new revenue stream is masking declining sales. Since PeopleSoft acquired J.D. Edwards in last year’s third quarter, its results from this year’s third quarter will be the first to show its year-over-year results from its expanded operations.

PeopleSoft has the difficult task of convincing customers that it remains healthy while telling courts and investors that Oracle is damaging its business. Conway said on PeopleSoft’s last earnings call that PeopleSoft has a list of delayed and lost deals attributable to Oracle’s campaign. In November, it begins a trial in Alameda Country, Calif., on a complaint charging Oracle with unfair competition and libel.

Gartner Inc. analyst Lee Geishecker said her firm has developed a “decision framework” to help customers considering buying from PeopleSoft. The framework takes into consideration factors such as the customer’s risk tolerance, the scope of the potential deal, and how far along it is.

Gartner isn’t offering predictions on whether Oracle will succeed in its takeover, but Geishecker said she doesn’t see Thursday’s pro-Oracle decision as a crippling one for PeopleSoft.

“It basically means they’re back to where they were before the DOJ filed its lawsuit. They’ve going to go back to their ‘business as usual’ mantra,” Geishecker said. “At their Connect show, the customers are going to be pretty intent on listening for the ‘all is calm’ message, and they’ve been pretty good about sending that.” Oracle could still face regulatory roadblocks: The European Commission had been closely scrutinizing the deal before pausing its review to await a decision on the DOJ’s lawsuit. The DOJ could also decide to appeal; the agency said it is “considering its options.”

One antitrust attorney following the case, Paul Friedman of Dechert LLP, said the DOJ would face long odds on an appeal, thanks to Judge Walker’s apparent meticulousness in mapping out his findings of fact. Walker’s decision ran to 164 pages.

“Judge Walker took as much time as he did in delivering the opinion because it is very grounded in his review of the evidence,” Friedman said. “The appeals court generally gives great deference to the lower court in findings of fact. Unless he made a really serious mistake, and it would surprise me if he did, the government may conclude that it can’t appeal.”

Those who watched the case unfold say the decision was unsurprising. Though the DOJ initially appeared to have a strong case for its limited definition of the high-end market for financial and human resources applications, observers say Oracle’s legal team effectively shredded that argument and demonstrated that the enterprise applications market is fragmented and highly competitive.

“Everything I saw about the case made this the only reasonable judgement,” said independent analyst Josh Greenbaum, who runs Enterprise Applications Consulting Inc. “I think justice has definitely prevailed.”

The question now for PeopleSoft is whether it can still thrive as an independent company. Thanks to an anti-takeover provision in PeopleSoft’s bylaws known as a “poison pill,” the company can continue to fend off Oracle advances, but as its sales and share price slip, it will face increasing pressure from shareholders to capitulate. It also faces mounting costs as Oracle’s bid lingers on. PeopleSoft has so far spent $70 million fighting Oracle.

Forrester’s Hamerman thinks PeopleSoft has lagged competitors on product innovation in the past year, a result he attributes to both the expense and distraction of Oracle’s campaign and to PeopleSoft’s integration of J.D. Edwards. PeopleSoft still has “a tremendous amount of resolve to keep this from happening,” but battle fatigue could make the company a more willing target for other buyers, he said.

“PeopleSoft needs to show it can live and breathe as an independent company,” investment bank Morgan Stanley said in a recent research note, while JMP Securities LLC suggested in a report that PeopleSoft might be attractive to other suitors — especially Microsoft Corp. In one of the surprises of the DOJ/Oracle trial, witness Microsoft admitted it had talks with business applications giant SAP AG about buying the company. Those talks were abandoned because of antitrust concerns and the daunting integration risks a takeover would pose, the companies said.

“PeopleSoft would be a much easier acquisition for Microsoft, in our opinion, given that it is based in the United States and is a more manageable size,” JMP’s analysts wrote in their report.

Analyst Greenbaum is among those who suspects that if Oracle doesn’t get PeopleSoft, another vendor will.

“The judgement going against them just increases the gloom. PeopleSoft as an independent company is less and less a viable reality today,” he said. “There’s a price on their head, and the uncertainty is really killing sales.”

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