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Oracle Just Can't Take a Hint

By Jim Kerstetter In the middle of the biggest hostile-takeover fight in the history of the software industry, Oracle CEO Lawrence Ellison went sailing. His Oracle BMW Racing yacht, a high-tech boat that in 2002 competed for sailing's storied America's Cup, whipped three other teams over the weekend of June 21 on San Francisco Bay. Ellison is finding his competitors on land rather more daunting. Executives at PeopleSoft (PSFT), the rival corporate software maker that Oracle (ORCL) has offered to buy for $6.3 billion, have mounted a formidable defense that could drag the takeover fight well into 2003.

PeopleSoft's efforts hinge on fanning the flames of antitrust concerns and on a "poison-pill" clause that would make a hostile takeover prohibitively expensive, even to a cash-rich company like Oracle. "PeopleSoft is really playing hardball," says Michael Weinberger, a managing director at York Capital Management, a New York-based arbitrage firm.

PeopleSoft execs haven't said what price would get them to the table. But given their tough tactics, Ellison likely will have to increase his offer well above the current $19.50 per share in cash. "Right now, we see no indication that Oracle is willing to go to the valuation levels and terms" that are necessary to get PeopleSoft's board to negotiate, says an executive close to the company.

HARD TO CALL. So how high does Ellison need to go? "PeopleSoft shareholders should demand $20 to $25 per share, minimum," says Bob Austrian, managing director at Banc of America Securities in San Francisco. "What they're offering right now is a slight premium, but we think the company is worth a lot more," says Pat Adams, a portfolio manager with Choice Investment Management, a PeopleSoft shareholder. (PeopleSoft was trading around $18, as of June 26.)

Adams says he would likely sell his shares if Oracle ups its offer into the $20s. That could happen. In a speech in London on June 24, Ellison hinted that he's willing to go higher. "Never say never," he said. Ellison also said he won't be dissuaded by PeopleSoft's planned acquisition of J.D. Edwards (JDEC), another software company, that could up PeopleSoft's value by well over $1 billion.

Analysts and arbitrage experts say the fight still could go either way, because there are so many balls in the air. "This is one of the hardest ones to call in a while," says Weinberger. If the threat from Oracle scares enough customers away, and PeopleSoft's quarter ending June 30 turns out ugly, PeopleSoft's board could be forced to the negotiating table.

SIGNALING DISINTEREST. However, by letting antitrust issues loose, PeopleSoft's board has added a wild card: Even if they decide to go with a future Oracle offer, a deal would still have to steer through a minefield of state and federal scrutiny. "A company should be reluctant to bring up antitrust issues," says Charles Biggio, a partner at Akin, Gump, Strauss, Hauer & Feld in New York and a former antitrust lawyer with the Justice Dept. "Once you bring it to the government's attention, you can't go back and say you've changed your mind."

Still, that's the road PeopleSoft's board is taking, making it pretty clear just how uninterested they are in selling. PeopleSoft has hired a top gun on the antitrust issue, Silicon Valley lawyer Gary Reback. He's best known as the guy who sicced the Justice Dept.'s antitrust watchdogs on Microsoft (MSFT).

Reback claims the combination of the second- and third-largest companies in the market for corporate software suites would limit customer choice. On its face, it sounds like a hard claim to make. Combined, Oracle and PeopleSoft would have only a 12% share of the sector, a distant second to German software maker SAP's (SAP) 20% share, according to AMR Research.

FORCED MIGRATION? PeopleSoft's tack has some precedent. Three years ago, even though Gerber Products had a 70% market share in the baby-food business, the Federal Trade Commission blocked No. 2 H.J. Heinz's attempted takeover of third-ranked Beech-Nut Nutrition baby-food producer Milnot.

Reback also claims that an Oracle acquisition of PeopleSoft would do irreparable harm to the Pleasanton (Calif.) company's customers. In the early days of the takeover fight, Ellison said Oracle planned to discontinue PeopleSoft's software and migrate the company's 5,100 customers to Oracle's corporate software suite.

That prompted an antitrust lawsuit from the state of Connecticut, which recently invested $100 million in PeopleSoft software. Connecticut's attorney general is in talks with attorneys general in California, Texas, Massachusetts, and Colorado, though officials in those states say they're just monitoring the situation. U.S. Justice Dept. officials also are scrutinizing the deal and have until June 30 to ask Oracle for more information.

PeopleSoft is encouraging customers to speak out as well. It has bought ads in a number of national business publications for them to express fears of being forced to become customers for Oracle's corporate software.

DOOMSDAY WEAPON. Oracle execs have been backpedaling ever since their remarks about discontinuing PeopleSoft products. They have offered to maintain its software for the next 10 years and to honor service contracts for the same time period -- twice as long as the normal contract (see BW Online, 6/25/03, "Oracle's Mr. Nice Guy Has His Hands Full"). But customers remain leery. "I have a healthy dose of skepticism," says Jill Israel, vice-president for financial processes at New Orleans-based Entergy (ETR), which is in the middle of a $30 million, two-year project with PeopleSoft.

While antitrust issues have captured the most attention, PeopleSoft's poison pill remains its most potent weapon. Eight years ago, the company created a so-called shareholders' rights plan. If a person or company amasses a 20% stake, PeopleSoft can offer millions of new shares to all of its existing shareholders -- except the party that owns the 20%. Doing so would dilute any potential raider's stake and make an acquisition too costly. The threat is so daunting that Oracle says it will rescind its tender offer if poison pill isn't removed. Oracle plans to ask a Delaware judge to strike it down on July 16.

Winning that suit won't be easy. "They'll find the court to be fairly deferential [to PeopleSoft], particularly if there are issues such as antitrust" at play, says Michael Klausner, a professor at Stanford Law School. Barring a court ruling, the only way to get rid of the poison pill would be to get rid of PeopleSoft's board, and the only way to do that would be at a scheduled shareholder's meeting -- 11 months from now.

WORLD TOUR. For the last two weeks, Oracle's top brass has been touring the investor world, with lunches and meetings in cities ranging from New York, Boston, and San Francisco to London, Madrid, and Rome. Oracle got investors' attention on June 18 by bumping the offer from $16 to $19.50. "Money talks," says Oracle Senior Vice-President Charles Phillips.

Still, it will take a far fatter offer to get the attention of PeopleSoft's board. Until that comes, or until Oracle finds a way to get rid of the poison pill, the takeover bid could be dead in the water, despite Ellison's insistence that the deal will get done. Kerstetter writes for BusinessWeek in San Mateo, Calif.

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