PeopleSoft, Oracle standoff likely to linger

The standoff between Oracle Corp. and PeopleSoft Inc. is once again at an impasse, as PeopleSoft’s board refuses to sell the company at the price Oracle has offered, and Oracle refuses to raise its bid.

A majority of PeopleSoft’s shares were tendered into Oracle’s US$24 (all figures U.S.) per share offer on Friday, but PeopleSoft’s board said in a letter sent to Oracle on Saturday that it is confident shareholders back the board’s plan to resist a takeover at that price.

“Based on the numerous conversations we have had with our largest stockholders over the past ten days, our board is convinced that a majority of our stockholders agree that your $24 offer is inadequate and does not reflect PeopleSoft’s real value,” PeopleSoft wrote.

Oracle had threatened to walk away from its pursuit of PeopleSoft if a majority of PeopleSoft’s shares weren’t tendered by midnight Friday. Because tendered shares can later be withdrawn, Oracle encouraged PeopleSoft shareholders to tender shares by the deadline if they wanted to see the tug-of-war between the two companies continue. PeopleSoft claims that a significant number of investors who tendered shares did so even though they believe the company should command a higher price. The board also maintains that if PeopleSoft remains independent, it will deliver better value to shareholders than the $8.8 billion Oracle has offered.

To boost its case, PeopleSoft’s board released aggressive financial forecasts projecting 2005 per-share earnings of $1.05 to $1.10, excluding some costs. That’s significantly above the $0.83 earnings per share consensus forecast of analysts polled by Thomson First Call.

Wall Street greeted the projection with widespread skepticism. PeopleSoft fell short of financial expectations in its first two quarters of this year, and analysts fear it has once again promised more than it can deliver. American Technology Research Inc.’s Donovan Gow called the board’s forecast “extremely optimistic,” while Shareholder Value Management principal Jeff Embersits said he doesn’t find the guidance realistic.

PeopleSoft and Oracle will meet Wednesday with Judge Leo Strine of Delaware’s Chancery Court, which Oracle has asked to void the antitakeover protections PeopleSoft’s board is using to keep Oracle at bay. Judge Strine heard arguments from the two sides last month and is in the process of preparing a decision on the case.

Legal experts say it’s unlikely he’ll interfere with PeopleSoft’s defensive provisions. Delaware court precedent is firmly on the side of allowing corporate boards discretion in how they handle hostile takeover bids — and if shareholders don’t approve, they always have the option of voting out the board, said William Lawlor, a mergers and acquisitions specialist with Dechert LLP.

“It’s not crystal clear, but the judge can still point to the fact that there is the ballot box in the spring (at PeopleSoft’s shareholder’s meeting),” Lawlor said. “This case has been going on for two years. Oracle can wait a few more months and take it to the shareholders.”

That’s what analysts now expect to happen. “I think PeopleSoft is going to take the proxy fight all the way to the bitter end,” said Shareholder Value Management’s Embersits. American Technology Research’s Gow also called that the most probable scenario.

PeopleSoft hasn’t yet set a date for its 2005 annual meeting, which will likely be scheduled for sometime between March and May. Four of its seven board members are scheduled for reelection, and Oracle will have the option of running an opposing slate of directors amenable to its takeover bid.

Meanwhile, PeopleSoft’s board buys time to meet its financial projections and convince shareholders of the company’s value as an independent company. For customers, that means another stretch of uncertainty about their vendor’s future.

Forrester Research Inc. analyst Paul Hamerman said he recommends customers update their software to the latest versions, to reduce some of the risk around continued product support. He also advises against signing long-term maintenance contracts, since he sees the current, uncertain environment as one likely to give rise to a third-party market for PeopleSoft maintenance and support.

Hamerman isn’t too worried that the distraction — and expense — of Oracle’s bid impairing PeopleSoft’s ability to develop a long-term strategy and vision. “They need to show customers and shareholders that they’re innovating,” he said. “They need to demonstrate, before a proxy fight, that they’re viable as an independent company, which I think they are.”

Others say a lingering battle will only continue to weaken PeopleSoft and Oracle — to the benefit of their chief rival, SAP AG. Oracle’s bid is generally considered to be artificially inflating PeopleSoft’s share price, which will likely plunge if Oracle walks away for good. Meanwhile, Oracle’s Ahab-like pursuit of PeopleSoft ties up resources some would like to see it devote elsewhere.

“Oracle should have better things to acquire than PeopleSoft,” Embersits said. “The big winner has been SAP from the get-go.”

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