Commentary: Trustbusters Are On The Wrong Trail
It was easy to sympathize with Judge Vaughn R. Walker as he listened to lead Justice Dept. prosecutor Claude F. Scott Jr. explain why the government wants to block Oracle Corp.'s (ORCL ) $7.7 billion hostile takeover of rival software maker PeopleSoft Inc. As Scott plowed through his opening remarks in a windowless federal courtroom in San Francisco on June 7, Walker peppered him with questions. "That sounds like good old-fashioned competition to me," Walker said as Scott described Oracle's discounting tactics. "Why would the government want to stop that?"
The judge's comments highlighted the squishiness of the feds' case as Justice tries to define a market that is both broader and faster-changing than it acknowledges. Oracle and PeopleSoft compete in the $9 billion enterprise applications software market: Both sell multimillion-dollar software packages that perform such tasks as balancing the books and managing payrolls for everyone from midsize companies to General Electric Co. (GE ). While it's true that the pair, along with German software giant SAP, (SAP ) dominate the market with a combined 40% share, it is increasingly populated by hundreds of others, including outsourcers like payroll giant Automatic Data Processing Inc. (ADP ) (ADP). Even Microsoft Corp. (MSFT ) wants in. Just as the trial was about to begin, Microsoft announced that it had considered acquiring SAP earlier this year. Says Steven M. Cohen, chief investment officer at Kellner DiLeo Cohen & Co. in New York: "This is probably one of the most quickly changing marketplaces."
That's not how the Justice Dept. sees it. In making its decision, Justice isn't looking at the $9 billion market overall. Instead, it's focusing on competition in a $400 million sliver -- what it calls "high-function" software used by human resources and finance execs at multinational corporations to manage far-flung operations. In that segment, Justice argues, the big three, which last year generated a combined $3.7 billion in applications software revenues, are the only viable alternatives, meaning customers could face higher prices and fewer choices if Oracle buys PeopleSoft. "High-end enterprise software may be very complex," Deputy Assistant Attorney General Thomas O. Barnett told BusinessWeek. "But the issue in the case is very straightforward."
Not so. The feds' pat view of enterprise software fails to account for its history and likely future. Ten years ago, SAP was entering the U.S., while Oracle in Redwood Shores, Calif., and PeopleSoft in Pleasanton, Calif., dominated at home. In the first quarter of 2004, SAP sold $155 million worth of applications software in North and South America, nearly double Oracle's Americas sales and 18% more than PeopleSoft's worldwide sales.
In other words, big competitors can develop quickly. Justice argues such a rival is unlikely to rise since the barrier to entry is so high. But what about Microsoft? Barnett says its "current products don't meet the needs of high-end customers" served by Oracle, PeopleSoft, and SAP. That could change fast. Before looking into buying SAP, Microsoft spent $2.5 billion acquiring two smaller enterprise software companies. Those outfits don't get Microsoft into the high end, but it's a start. And Microsoft made it clear, in talking with SAP, that it wants to play in that market.
The feds also are discounting second-tier companies like Lawson Software Inc. and Hyperion Solutions Corp. In court, the DOJ aims to use Oracle documents showing that it rarely competes with these minnows. Yet Oracle has lost several big contracts to the likes of Lawson and Hyperion. And thanks to the growing trend of offering software as a service over the Net, companies like ADP and Fidelity Information Services, a Florida outsourcing giant, are also providing outsourced alternatives.
There are plenty of reasons to dislike Oracle's takeover bid. Some investors think $7.7 billion undervalues PeopleSoft, while loyalists are justifiably concerned about Oracle's spotty customer relations. But the notion that the takeover would imperil customer choice holds little water.
By Jim KerstetterWith Lorraine Woellert in Washington