PeopleSoft: Sour on a Sweetened Bid?

The takeover target may not think Oracle's new offer adequately reflects its improved results, and the deadline may not end their battle

By Jim Kerstetter

An end to the 17-month takeover squabble between software giant Oracle (ORCL ) and rival PeopleSoft (PSFT ) may not be in sight even though, in what Chairman Jeffrey O. Henley called a "best and final" offer, Oracle on Nov. 1 upped its unsolicited bid for the Pleasanton (Calif.) company by 14%, to $24 per share, on Nov 1.

That brings the value of Oracle's hostile bid to $8.8 billion -- 60% more than what PeopleSoft shares were valued at before the takeover fight began. But the latest increase carried a caveat and a deadline: If at least half of PeopleSoft's outstanding shares aren't tendered to Oracle by the end of Nov. 19, the offer will be withdrawn, Henley said in a conference call. Finished. Game over. CEO Lawrence J. Ellison and his $10 billion company will move on to other things.


  The caveat, Henley said, is that PeopleSoft's board of directors must rescind a so-called poison pill that would allow the takeover target to flood the market with new shares in the eventof a takeover, making the outfit too expensive to acquire. "We believe the time has come for the stockholders of PeopleSoft to decide the outcome," Henley said.

Don't expect PeopleSoft's board to take the bait. In a carefully worded press release, the board advised investors not to make a move until they had time to consider the latest offer.  They stopped short of saying no -- but may have telegraphed their decision when the release went on to note that the board has unanimously rejected every offer Oracle has made since its initial $16-per-share bid in June, 2003, including a high of $26 per share earlier this year. Oracle dropped its bid to $21 per share in May because of PeopleSoft's slumping software sales.

Ellison has tenaciously pursued PeopleSoft, despite its rebuffs, because, he says, the software industry is about to enter a stage of considerable consolidation, and Oracle needs PeopleSoft's long customer list to help it compete with other tech giants like IBM (IBM ) and Microsoft (MSFT ).


  But the fight has always been about more than dollars and cents. Craig Conway, who was forced out of the chief exec's office at PeopleSoft last month, used to work for Ellison, and there was no love lost between the two. Even David Duffield, PeopleSoft's beloved founder who came back to run the outfit after Conway was deposed, used to run anti-Oracle pep rallies at PeopleSoft's headquarters.

Despite the takeover target's reluctance, Wall Street was quite pleased with the increased bid. PeopleSoft shares jumped 10.4%, to $22.93, in one day of trading. "[Oracle's latest salvo] represents a substantial premium over what the stock would trade for if it weren't for our offer," Henley said. As of Oct. 29, about 5.5% of PeopleSoft's shares had been tendered to Oracle.

Is Ellison & Co.'s offer enough? Wall Street analysts are still split over a fair price. Some think Oracle should go as high as $30 per share, given that PeopleSoft has about $1.6 billion in cash and short-term investments, up about 16% from the beginning of the year, and a huge customer base. Also, PeopleSoft's most recent quarter was surprisingly strong, with $699 million in revenues, 12% more than the prior year, and $24 million in net income, reversing a $7.3 million loss a year ago.


  The PeopleSoft board originally said it wouldn't accept the offer because of the fear that U.S. and European antitrust regulators would block the merger. But when trustbusters in the U.S. were defeated in federal court and their counterparts in Europe decided against stepping in, the board shifted its focus to the offer price. Is PeopleSoft, with more cash and better sales than a year ago, worth less than it was in the spring? It's a tough argument to make.

Given the board's intractability, it's quite likely PeopleSoft will still be an independent company on Nov. 20, and Oracle will finally put an end to this brass-knuckled fight, perhaps to find a more compliant target. That's only if Ellison & Co. really mean it about the final deadline.

Interestingly, Ellison hasn't had much luck buying things lately. He said at an investors' conference last week that he was rebuffed in recent attempts to buy the storied San Francisco 49ers football franchise and the considerably less famous Golden State Warriors basketball team.


  One way or another, the fight with PeopleSoft seems likely to drag on a bit longer. In January, 2005, a jury in Oakland, Calif., is expected to hear allegations in a $1 billion suit brought by PeopleSoft that Oracle intentionally tried to interfere in PeopleSoft's business.   And if Oracle does walk away, headaches could just be beginning at PeopleSoft, whose shares, propped up for so long, aren't likely to stay in the $20 range. And it likely wouldn't be long before shareholder lawyers sniffed a suit.

Joined in mutual acrimony, it sure looks as though Oracle is trying to bring an end to the battle. But the two companies may end up slugging it out for at least another year.

Kerstetter is a correspondent in BusinessWeek's Silicon Valley bureau

Edited by Beth Belton

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