Oracle’s PeopleSoft bid could mean trouble for users

If Oracle Corp. succeeds in its bid to acquire PeopleSoft Inc., users are in for a rough transition, industry analysts said Friday.

With Oracle’s offer of lowball price for PeopleSoft, it’s not clear how likely the takeover attempt is to succeed. But based on Oracle’s culture and past history, it would face significant challenges in meshing its products and operations with PeopleSoft’s, observers said.

“The cultural differences at Oracle and PeopleSoft are night and day,” said Yankee Group analyst Michael Dominy, in Boston. “I’m skeptical at this point. I would need to see a lot more detailed information from Oracle on how they would do this so they wouldn’t piss off all the customers that are PeopleSoft customers.”

One customer agreed that more time is needed to sort out the implications of the potential acquisition.

“I can think of all kinds of things that would be positive, and all kinds of things that would be negative. It’s just too early,” said George Muller, vice-president and chief information officer for Imperial Sugar Co. in Sugar Land, Tex.

Oracle is offering $5.1 billion cash, at $16 per share, to acquire PeopleSoft. [Please see Oracle to make $5.1 billion bid for PeopleSoft]. Company executives say they would stop selling PeopleSoft’s products to new users, but continue selling them to current users, while encouraging those users to eventually migrate to Oracle applications. Oracle also intends to incorporate some of PeopleSoft’s technology into its own Oracle E-Business Suite. PeopleSoft executives have not commented on Oracle’s offer.

Gartner Inc. analyst Ted Kempf, in Chicago, said a merger would be a bad thing, from the perspective of PeopleSoft’s customers.

“I don’t think (Oracle is) interested in developing the products. They just want the support revenue. If you’re a diehard PeopleSoft client, you’d have to migrate to Oracle or something else.”

The bid likely took PeopleSoft by surprise, both analysts said, noting that PeopleSoft would probably not have proceeded with Monday’s announcement of its intended J.D Edwards & Co. buyout if it had seen Oracle’s attempt coming.

Whether Oracle is serious in its offer is another open question.

“When you look at Oracle’s positioning over the past year, and what (Oracle Chairman and Chief Executive Officer) Larry Ellison has been saying about the market shakeout, it’s clear he didn’t view PeopleSoft as a long-term survivor,” Dominy said.

Oracle’s offer, for a five per cent premium on PeopleSoft’s share price, is a bit of an insult, he said. On the other hand, Dominy said he wouldn’t be surprised to see Oracle raise the offer.

Financial analysts are making similar comments.

“We suspect Oracle will need to sweeten the pot to get the deal done,” Morningstar Inc. analyst Todd Bernier wrote Friday in a research note.

Bernier predicted that if the deal is completed, it will spark a rapid consolidation of remaining vendors in the enterprise applications market, with Siebel Systems Inc. another likely candidate for takeover.

Monday’s announcement of PeopleSoft’s plans to merge J.D. Edwards into its own operations meant that Oracle Corp. would be bumped to the number-three position in the enterprise resource planning (ERP) market, behind leader SAP AG and the bulked-up PeopleSoft.

A reluctance to accept a back seat position could have sparked Oracle’s decision to make a run on PeopleSoft, analysts said. But the massive market consolidation a PeopleSoft takeover would cause could be a red flag for federal regulators, they warned. If Oracle succeeds, it and SAP would control a sizeable majority of the enterprise applications sector.

Like Siebel, PeopleSoft has been struggling financially because of the soft economy and weak enterprise software market. Its licensing revenue dropped 40 per cent year-over-year in this year’s first quarter, while its total revenue dropped five per cent, from US$483 million in last year’s first quarter to US$460 million in this year’s quarter. The company has churned through several rounds of layoffs.

But if Oracle doesn’t swallow PeopleSoft, it’s unlikely any other vendors will, said Yankee Group’s Dominy. IBM Corp., SAP and Microsoft Corp. would all have the financial resources to do so, but such an acquisition wouldn’t fit into their strategic plans, he said.

“If this doesn’t work with Oracle, I think they’ll continue down the path of PeopleSoft acquiring J.D. Edwards and running on its own,” he said.

– With files from Tom Krazit, IDG News Service