Oracle, DOJ gear up for merger trial

Oracle Corp. and the U.S. Department of Justice are heading to court Monday to do battle over Oracle’s hostile takeover bid for PeopleSoft Inc., a deal the government says would choke competition in the enterprise applications market and lead to higher prices for customers.

Lawyers for the two sides are due to present opening arguments Monday morning in a U.S. federal court in San Francisco. Each side then gets two weeks to present its case. The trial is expected to last about a month, and government sources said they expect a verdict fairly quickly, perhaps as soon as August. If either side appeals, however, the drama could drag out until next year.

Judge Vaughn Walker has been busy resolving last-minute conflicts over access to documents, the eligibility of expert witnesses and other pre-trial matters. At a hearing Wednesday he told PeopleSoft that its president and chief executive, Craig Conway, must be available to give testimony in court on June 29, over protests that he will miss part of an important customer conference.

Judge Walker also quashed a request from both parties to have 90 minutes for their opening arguments, telling them keep it to 45 minutes each. “I’ve no doubt about the quality of the advocacy, but I’m interested to hear the witnesses,” he said. Asked by the DOJ if the two-week limit will be strictly enforced, he replied, “I’m not going to run a clock, but I get irritable, and that’s easier to read than a clock.”

The DOJ presents its case first. It has argued that the merger would leave only two companies — SAP AG and the combined Oracle/PeopleSoft — to sell a type of “high function” human resources and financial management software that large organizations need to run their businesses. The reduced competition could lead to price hikes of five per cent to 28 per cent, the DOJ argued in court papers this week.

Legal experts said the case hinges in large part on the DOJ’s ability to convince Judge Walker that the market it describes actually exists. “The contest will center in significant part on market definition…. If the court accepts the government’s proof that there is a such a thing as a ‘high-function’ enterprise software market, then Oracle’s challenge becomes much greater,” said Paul Friedman, partner and co-chair of the antitrust group at Dechert LLP. (Dechert does some legal work for Oracle but none related to antitrust or the DOJ case, he said.)

Oracle has dismissed the DOJ’s definition as a fiction dreamed up to make the impact of the merger seem far greater than it would actually be. Big customers can turn to numerous vendors for their human resources and financial applications, it argues, such as Lawson Software Inc. and American Management Systems Inc. (AMS). The DOJ has also ignored multivendor “best of breed” solutions and the option to outsource back-office functions, Oracle said.

“Plaintiff’s case begins with the most confusing, meaningless market definition ever pursued in a government merger challenge,” it said in court papers filed this week.

To make its case the DOJ plans to call several customers to the stand next week, starting with cable provider Cox Communications Inc., to testify about their software requirements and the nature of the sales and bidding process. It may also use videotaped deposition testimony next week from Larry Ellison, Oracle’s chief executive officer. Also on its witness list is Doug Burgum, head of Microsoft Corp.’s business applications unit. The DOJ hopes his testimony will show that Microsoft will not be a major player in the enterprise applications market for years to come.

Oracle is scheduled to start presenting its case around June 21. Besides its own top executive, Ellison, its witness list includes Steve Mills, head of IBM Corp.’s software group; Cindy Bates, general manager of Microsoft Corp.’s U.S. small business division; and SAP AG executive Richard Knowles. It has blocked out up to six hours for testimony from PeopleSoft’s Conway, far more than for its other witnesses. Both sides will also call several expert witnesses.

Analysts were divided over the DOJ’s market definition. Joshua Greenbaum, principal analyst at Enterprise Applications Consulting, in Berkeley, California, said the DOJ is showing its “extraordinary ignorance” by arguing that only three applications vendors can meet the needs of large buyers. The DOJ itself picked AMS recently for a US$24 million deal to update its accounting software, he noted.

But Gartner Inc. analyst Lee Geishecker was less sure. Corporations in certain “asset intensive” industries, such as utilities and construction, could indeed be considered dependent on the top three vendors, she said. “Depending on the context, the DOJ may be right. There are very many ways to slice the industry,” Geishecker said.

Whatever the outcome, Oracle’s acquisition bid faces other hurdles. If it beats the DOJ, it still needs a green light from the European Commission, which is investigating the merger and has listed several concerns about it. Oracle must also secure backing from PeopleSoft’s shareholders, who so far have shown little enthusiasm for the deal.

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