By Alex Salkever Oracle CEO Larry Ellison likes to portray himself as a wise warrior, a reader of the Chinese martial philosopher Sun Tzu, and a deep-thinking tactician. And he indeed won a hard-fought victory over the U.S. Justice Dept. when a U.S. District Court judge ruled on Sept. 9 in San Francisco that Oracle's (ORCL) hostile takeover effort against competitor PeopleSoft (PSFT) didn't violate antitrust laws. Of course, that's hardly a green-light for the deal. Justice could still appeal and prolong Oracle's battle, which Ellison initiated back in June, 2003.
Chances are good, however, that Oracle will prevail. An appeal appears unlikely given the strong evidence Oracle presented showing robust price competition in the business-application software sector that PeopleSoft specializes in. And the target's board of directors may now reconsider Oracle's $7.7 billion tender of $21 per share (see BW, 9/27/04, "PeopleSoft: Ease the Inevitable").
In addition to trying to fend off Oracle, PeopleSoft has seen its primary market take its lumps as the promised software rebound has failed to materialize. Business-application software involves computerizing complex tasks such as financial and human-resources management or manufacturing and logistics. On July 27, PeopleSoft CEO Craig Conway announced that second-quarter earnings had fallen by 69% from a year ago. He blamed the decline on customer uncertainty raised by the Oracle bid, which is undoubtedly an accurate assessment.
NEW MARCHING ORDERS. For Oracle, however, winning the takeover battle might be the easy part. Big tech acquisitions don't always go smoothly and have often failed to provide much of a boost to the acquirer. So the likely question now facing Ellison & Co. is how to transition from battle mode to merger-integration mode and ensure that Oracle's juicy operating margins, in the high-30% range, remain intact as PeopleSoft is absorbed.
The obvious place to start is by eliminating redundant staff and functions. PeopleSoft has 12,000 employees spread across 150 countries. Many of them are in functions such as accounting and human resources that Oracle staffers also perform. Analysts have estimated that more than half of PeopleSoft's employees could end up out of work.
With Conway & Co. still digesting their own $1.7 billion acquisition of fellow business-applications company J.D. Edwards in June, 2003, the redundancies in some areas may actually be three-deep. Oracle Co-President Safra Katz has said in the past that she wouldn't shy away from job cuts. Oracle declined to comment for this story.
"They are going to have to do a major restructuring. It's an accretive deal, but to get the benefit that people are anticipating, they're going to have cut a lot of heads," says Clark Chang, a managing director at investment bank Fulcrum Global Partners.
SECURITY CONCERNS. However, eliminating obvious personnel redundancies could prove trickier than it sounds. Ellison has promised to continue supporting product lines from PeopleSoft and J.D. Edwards for a full decade. At the same time, the CEO has said he wants to eventually shut these product lines down. Managing to do both, while keeping customers happy and costs down, could prove a tall order.
While it's possible to stop development of new versions of PeopleSoft products, Oracle will continue servicing the current crop, meaning armies of consultants and engineers to solve problems. Oracle will also have to deal with ongoing security updates and other basic software improvements to ensure that the PeopleSoft's products now running all over the world remain safe and secure.
"You're developing new products or enhancing existing products. At the same time you're maintaining old products," says Robert Becker, an analyst with Argus Research. "I think they're really going to have to address both issues."
FANCY FOOTWORK. Worse, certain parts of PeopleSoft could prove particularly resistant to cost-cutting. A significant portion of J.D. Edwards' customers run their software using databases and mainframe computers from Oracle archrival IBM (IBM). "That's such a foreign entity to Oracle at this point. They have got to keep [Edwards employees] in to understand what's been done to that product. And they have to figure out how to support a very large IBM environment," says Yvonne Genovese, a vice-president at tech consultancy Gartner who covers the enterprise-software sector.
Aside from keeping existing customers happy, Ellison will have to quickly rationalize the three companies' sales efforts. That could mean lots of fancy footwork and at least a dash of chaos. "The first year or so there's going to be some confusion even among [Oracle's] own salespeople. Selling multiple versions and product lines with three companies is going to be a hairy thing," says Chang.
Oracle itself was the beneficiary of precisely this type of mangled merger when it managed to pick off scores Informix database customers after IBM purchased Informix and attempted to move those customers to its own DB2 database software package.
A WAITING SAP. Another headache for Ellison: Customers now in the process of negotiating deals with PeopleSoft and J.D. Edwards may think twice or more before pressing the buy button, thanks to all these uncertainties. And they could prove to be even warier if Oracle tries to sell them its own business-application software at the expense of the PeopleSoft/Edwards product lines.
Beyond this, Ellison must figure out how over time he can move as many PeopleSoft customers as possible to a unified product line. And he must do so without sending them into the arms of SAP (SAP). The German software giant is the leader in business applications, with nearly 60% of the market.
The CEO may be figuring that a 10-year horizon might give PeopleSoft's customers enough time to get accustomed to the idea of jumping to Oracle wares. But that might still be a harder sell than Ellison realizes. According to Gartner's Genovese, many PeopleSoft and SAP customers are choosing those companies' software packages due to the flexibility they provide to customers wishing to upgrade their systems and add new code and functions.
So Oracle may have to do some heavy lifting to make its own business-applications software more flexible in order to keep these customers in the fold. Flexibility isn't something Ellison is often accused of, but he may need to learn to talk softly and carry a small stick if Oracle is going to profitably emerge from what would clearly be a perilous acquisition. Salkever is Technology editor for BusinessWeek Online