Oracle Busts the Trustbusters' Case

A judge rules that the Justice Dept. can't block Oracle's bid for PeopleSoft, which still has some cards yet to play

By Jim Kerstetter

Maybe you can fight City Hall after all -- at least if you're Larry Ellison, CEO of Oracle (ORCL ). In a stunning 164-page decision released late Sept. 9, U.S. District Judge Vaughn Walker ruled that the software giant can pursue its hostile takeover of rival PeopleSoft (PSFT ). The U.S. Justice Dept. had sued to block the proposed merger on grounds that it would be anticompetitive.

Walker's ruling was a decisive victory for Ellison, a frequently flamboyant Silicon Valley tycoon who shocked the software industry in June, 2003, by launching his effort to acquire PeopleSoft. Ellison bucked the odds again in February, when he went to court to fight Justice Dept. trustbusters. His testimony was also the highlight of the monthlong antitrust trial. "Stop me at any time!" Ellison said at one point during a rambling description of the software market.


  Certainly, the posh executive suite of Oracle's Redwood Shores (Calif.) headquarters was celebrating. For PeopleSoft brass, however, Walker's ruling means plenty more headaches. Oracle is offering $21 per share, or about $7.7 billion in cash, for its rival. PeopleSoft shares jumped 10.25%, to $19.79, in the full day of trading after the decision was announced. Oracle shares were up 5.34%, to $10.46. So far, about 7% of PeopleSoft's shareholders have tendered their shares to Oracle.

Will that number increase now that the Justice Dept.'s hurdle has been cleared? Oracle execs sure hope so. But it's unlikely that PeopleSoft's board will surrender quietly. The outfit said in a written statement that its board will consider the antitrust ruling's implications.

It would take a major about-face for the board to start negotiating. It has rejected every Oracle offer over the last 15 months. And enmity for Ellison runs deep in PeopleSoft's executive ranks. Chairman and founder David Duffield famously led PeopleSoft employees in "kill Oracle" chants in the 1990s. And CEO Craig Conway, a former Oracle employee, has engaged in a running war of words with Ellison since the takeover fight started.


  PeopleSoft's board has consistently argued that the takeover wasn't likely to hold up against antitrust scrutiny. To further the point, the company even hired Gary Reback, the Silicon Valley antitrust lawyer who helped Justice do battle with Microsoft (MSFT ). Reback prepared a long legal brief detailing why he believed the Oracle takeover would hurt customers. He was a daily fixture at the trial, even offering his opinions in a daily blog on PeopleSoft's Web site.

Justice argued that combining the two companies would limit the choices of multinational corporations looking for software to run their financial and human-resources systems. That market is now dominated by German software maker SAP (SAP ). Combining PeopleSoft and Oracle would still give them only about a 12% market share, vs. SAP's 20%, according to analyst estimates. Nonetheless, Justice lawyers argued that the merger would allow Oracle and SAP to raise prices.

However, Judge Walker, known as a stickler for detail, rejected the government's argument. Justice lawyers "have not proved localized product or geographic competition between Oracle and PeopleSoft that will be lessened as a result of the proposed merger," he wrote. Nor would the combination "create a dominant firm occupying a product or geographic space in which there is no serious competition."


  So what now? Ellison can't quite take a clear run at PeopleSoft -- not yet, at least. The European Commission is also scrutinizing the takeover attempt, and Justice can still appeal Walker's ruling. PeopleSoft has also sued Oracle, claiming that it has intentionally interfered with PeopleSoft's business. That trial is expected to start in November.

But PeopleSoft is weakening as it does battle with both Oracle and the flat corporate software market. In July, it warned investors that it would miss sales expectations and said the Oracle fight was at least partly to blame. The Pleasanton (Calif.) outfit has spent more than $70 million battling the takeover.

After all those defenses, PeopleSoft's board still has a so-called poison pill provision that would make it too costly for a corporate raider to take control of the company. Oracle Chairman Jeffrey Henley homed in on the poison pill in a written statement: "This decision puts the onus squarely on the board of PeopleSoft to meet with us and to redeem their poison pill so that the shareholders can accept our offer."

Walker's decision puts the heat on PeopleSoft's board to soften its stance and take a seat at the negotiating table. If that happens, it will be a most bitter pill to swallow.

Kerstetter is a correspondent in BusinessWeek's Silicon Valley bureau

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