By Jim Kerstetter To: Oracle CEO Lawrence J. Ellison
Re: Your PeopleSoft takeover bidDear Larry:
You've been trying to acquire your software rival PeopleSoft (PSFT) for more than a year now. Trouble is, people are still awfully confused about why you want to do this.
At first, you sounded like you were going to shut down PeopleSoft, salt the earth of its Pleasanton (Calif.) headquarters, and drive its employees into the desert. O.K., that's a bit of an exaggeration. But your early tough talk sure scared many PeopleSoft customers, who thought they were going to have to spend big bucks to migrate over to Oracle's (ORCL
software, not to mention the 8,000 or so PeopleSoft employees who thought they would be out of a job. Given all the angst, it's not so surprising that the Justice Dept. jumped in and is trying to block the $7.7 billion takeover on antitrust grounds.
SHOW THEM THE MONEY. Maybe that's why you've sounded more gentle about your plans for PeopleSoft in recent months. Now you say you're going to maintain PeopleSoft's software for 10 years, maybe keep a few more of those employees than you originally said. That's not just being nicer, that's sound business. After all, maintenance fees from PeopleSoft's customers bring in $297 million per quarter right now. Maintenance margins can go as high as 90%. Who wouldn't want to add that to their top line?
So, Larry, it's time to ask: What are your intentions here? It's pretty clear that if you really want to land PeopleSoft, you're going to have to up your offer. Your latest of $21 per share for a company that's currently trading at about $18 per share isn't going to cut it. Your old $26 offer was more intriguing, but even that wasn't lighting a fire under shareholders. The two major shareholder advisory firms were split on the issue, and some analysts still think your offer undervalues PeopleSoft. Analyst Tad Piper, at Piper Jaffray, has a 12-month target price for PeopleSoft at $28 per share.
I understand you'd rather start negotiations at $21, rather than $26, but you're going to have to pony up a lot more cash. PeopleSoft's board of directors has a poison-pill provision that allows them to flood Wall Street with new PeopleSoft shares if and when a corporate raider acquires 20% of the company.
That maneuver could effectively make PeopleSoft too expensive to buy. Sure, that clause can be eliminated: Litigate it and get it thrown out, or get the shareholders to demand that it's removed. But you're going to have to prime shareholders with a lot more money to get them excited enough to fight their board of directors. So far, the enthusiasm just isn't there.
TIME FOR HUMILITY. Let's consider another tack: In truth, this could be quite a successful marriage, no? Perhaps you should start talking about this as more of a merger than a hostile takeover. You need to explain PeopleSoft's strategic importance to Oracle's future, other than just being a cash cow. Let's face it: While your database-software business is doing great, with new software-license sales up 15% over last year, your enterprise-applications business isn't up to snuff. New-license revenue was down 6.1%, to $231 million, in the fiscal quarter that ended in May.
Yes, PeopleSoft's new-license sales are also dragging. They were $131 million in the first calendar quarter. It's impossible to make an apples-to-apples comparison to last year because PeopleSoft acquired J.D. Edwards & Co. last summer (and J.D. Edwards ran on a different fiscal year than PeopleSoft). But it's fair to say that license revenues are up slightly from last year. Of course, it's also hard to say if that's because of the cloud hanging over the takeover attempt or because of problems in PeopleSoft's own business.
That said, bringing in PeopleSoft's technology -- and the executive and engineering talent behind it -- would be a boon not just to your applications business but to your targeted rival as well. Let's face it, the German software maker SAP (SAP) is dominating both Oracle and PeopleSoft right now. Just milking PeopleSoft's installed base isn't going to fix the problems with your own applications business. Bring in some of that software talent. Let them run the applications show inside Oracle. With your resources behind them, they'd do a terrific job.
REMEMBER, IT'S ABOUT PEOPLE. You have to understand why this takeover has ticked off so many people. PeopleSoft has always had a reputation for doing the right thing for customers. It's the "people" company, as they say. Its founder and chairman, David Duffield, has given a fortune to animal-rights causes, such as shelters. Saving kittens and puppies -- you can't beat that kind of P.R., Larry. Still, if you show you're really not so bad, not just another barbarian at the gate, Duffield and CEO Craig Conway could face pressure from their shareholders to be more open-minded about your bid.
Now if the trial with the Justice Dept. doesn't go your way, all this advice is just an academic exercise. But if you win, it's time to show how much you care about PeopleSoft's employees and its customers. Maybe then, PeopleSoft shareholders will actually get enthusiastic about this deal -- and you'll be able to go ahead with this marriage. Kerstetter is a correspondent in BusinessWeek's Silicon Valley bureau