Commentary: Oracle vs. PeopleSoft: And the Winner Is...SAP

Oracle Corp. (ORCL ) CEO Lawrence J. Ellison is always on the lookout for the next big trend. Long before the controversial Silicon Valley tycoon launched a $5.1 billion hostile bid on June 6 to take over rival PeopleSoft (PSFT ) Inc., he said he wanted Oracle to do for corporate software what Microsoft (MSFT ) Corp. had done for PC software: Become an industry consolidator that makes difficult-to-connect software snap together like Lego blocks in a so-called suite.

Ellison's vision makes sense. After all, Microsoft took control of the desktop market in the late 1980s by bundling word processing, a spreadsheet, and other functions into its Office suite. And the same could happen in corporate software. As the market consolidates and matures, companies that sell only the software that runs customer management systems or supply chains are likely to be pushed aside in favor of suite makers such as Oracle or Germany's SAP (SAP ) which can supply all a corporate buyer's needs. In software parlance, suites are winning out over best-of-breed. "Best-of-breed is dead," crows Ellison. "Except for dog shows."

So how does Ellison's grab for PeopleSoft fit in? Mainly, he's trying to bump off the only other true suite maker, PeopleSoft, to make it a two-horse race between SAP and Oracle. And on June 18, he showed skeptics he was serious, upping his PeopleSoft cash bid from $16 to $19.50 per share -- or about $6.3 billion. PeopleSoft shares jumped 4.5% on the news, to close at $17.93. While the original offer was a lowball bid, analyst Bruce Temkin of Forrester Research Inc. figures the new one may be enough to get edgy investors already worried about consolidation to cash out.

But even if Ellison's hostile bid wins, Oracle will still be playing catch-up. When it comes to corporate software suites, SAP, not Oracle, is the gorilla buyers are gravitating toward. SAP's expected $7.4 billion in revenues should give it a 20% share this year for corporate software, according to AMR Research Inc. Oracle has just 7%, and even with PeopleSoft, it would reach just a 12% share. SAP software has a reputation these days for being less buggy than Oracle's.

SAP is already elbowing niche players aside. In customer management, for example, No. 1 Siebel Systems Inc.'s expected share this year will be 15%, down five percentage points in the past two years. SAP's share should hit 12%, up five points over the period.

SAP's advantage could grow, even if Oracle wins PeopleSoft. Ellison's stated plan to shut down PeopleSoft could force customers to spend tens of millions switching from PeopleSoft to a new provider eventually. While Ellison promises to make it easy to switch to Oracle, his tactics could prompt an exodus to SAP. "They come out looking like adults," says Bruce M. Richardson, senior vice-president at AMR.

Oracle and PeopleSoft, meanwhile, look like kids scrapping in the sandbox. PeopleSoft and J.D. Edwards (JDEC ) & Co., which PeopleSoft announced on June 2 it was going to acquire in its own bid to become No. 2 in the market, have both gone to court asking for an injunction to stop Oracle from making a tender offer directly to shareholders. On June 16, PeopleSoft CEO Craig Conway sweetened his bid for Edwards to $1.75 billion in cash and stock. Not to be outdone, Oracle has sued the boards of both PeopleSoft and J.D. Edwards, to stymie their merger and to get rid of a "poison pill" clause PeopleSoft could use to block the Oracle takeover. And just hours after Oracle upped its PeopleSoft bid, Connecticut officials announced plans for an antitrust suit to halt the takeover.

Ellison's longtime nemesis, Microsoft Chairman William H. Gates III, wrote the book on taking control of a market with software suites. Selling the best individual product no longer mattered; integration and simplicity did. But even if best-of-breed is dying out in the corporate software market, it's far from clear that Ellison's maneuverings will make him the top dog.

By Jim Kerstetter

With Steve Hamm in New York

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