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PeopleSoft Sure Plays Hard to Get

By Jim Kerstetter In retrospect, most people should have expected software maker PeopleSoft (PSFT) to fight tenaciously the hostile takeover bid by rival Oracle (ORCL). In the mid-1990s PeopleSoft employees gleefully chanted "kill Oracle" at corporate pep rallies. Current Chief Exec Craig Conway is a former Oracle hand with no love lost for his old boss, CEO Lawrence J. Ellison.

As Conway likes to point out, nothing motivates employees like the possibility of a hostile takeover -- and huge job losses. Since Oracle announced its $7.3 billion bid in June, PeopleSoft has exceeded Wall Street expectations -- twice. The Pleasanton (Calif.) concern has managed to push through a merger with another business-software provider, J.D. Edwards. Its stock has jumped nearly 40%, to $21.72. And it has rallied customers, state attorneys general, and potentially federal regulators to its defense. "I consider this to be over," says Conway.

MONEY-BACK GUARANTEE. Bravado from the corner office? Certainly, but Oracle's bid is starting to look like it's on the ropes. On Nov. 10, the database giant said in a Delaware court filing that a takeover would not be "economically reasonable" if PeopleSoft is allowed to continue with a so-called customer-assurance program. The unusual program guarantees customers a payment of up to five times the cost of software purchased if PeopleSoft gets taken over. Oracle has asked the courts to bar PeopleSoft from offering the rebates, which could cost an acquirer more than $800 million.

PeopleSoft is telling its customers that if Oracle -- or any raider, for that matter -- takes it over and fails to meet certain software-support conditions, the client is guaranteed money back -- from the acquiring company. Ellison has said all along he won't overpay for PeopleSoft. Just what "overpay" means is left to interpretation, but an extra $800 million because of the unusual contract could fit the bill.

Arcane customer agreements are hardly Oracle's only hurdle. Even if a judge sides with Oracle on that issue, the Justice Dept. could oppose the deal because it would reduce competition among providers of giant business-software suites to two outfits -- Oracle and German-based SAP (SAP). A Justice spokesperson declined to comment on an investigation, but PeopleSoft customers said on Nov. 12 they continue to receive information requests from federal investigators.

POISON-PILL PROBLEM. Does that mean Justice will block the takeover, as USA Today reported on Nov. 12? Tough to say. European Union investigators are also taking a hard look at the bid. Oracle execs have said repeatedly that if the government blocks the deal, they'll back off.

Yet Ellison scoffs at the notion that the merger would be anticompetitive. After all, he says, earlier this year Conway made overtures to buy Oracle's applications business. "If Craig Conway is running the business, I guess it's not an antitrust issue," Ellison said in a recent interview. "I guess I'm the antitrust problem." An Oracle spokesperson says it intends to move ahead with the bid, and execs there are confident Justice will give it the green light by yearend.

Still, there's also the matter of PeopleSoft's "poison pill." Oracle's courtroom move to block its customer-rebate program was an amendment to an already-existing lawsuit to get rid of PeopleSoft's toughest anti-takeover measure. In place for more than a decade, the poison pill kicks in and floods the market with new PeopleSoft shares if a raider acquires 20% of the outfit. So far, about 7% of PeopleSoft's shareholders have accepted Oracle $19.50-per-share offer, which is about $2 less than PeopleSoft's current trading price.

Oracle says it's soldiering on. But in the end, the deal's cost could be what matters most: PeopleSoft may just have too high a price tag, even for a big, rich company like Oracle. Kerstetter covers technology from BusinessWeek's San Mateo bureau

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