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Oracle, DoJ Gird For Legal Battle

One year ago, PeopleSoft was happily preparing for its acquisition of J.D. Edwards, when Oracle dropped a bombshell in the form of a hostile takeover.

The year that followed highlights just how the two companies and the two men that run them are struggling with the changing market for enterprise software.

Now, Oracle is preparing to defend itself against the U.S. government's anti-trust lawsuit that looks to prevent the $7.7 billion hostile takeover from happening. Even if the Redwood Shores, Calif.-based database giant survives the legal battle, it may still face European regulators and a nasty proxy war from PeopleSoft shareholders.

"Obviously this deal will not work if the Justice Department can win its case," Jay Desai, CEO and Founder of industry think tank Institute of Global Competitiveness, told internetnews.com. "Even then, I give this acquisition a less than 5 percent chance of happening. There are too many other obstacles in the way, such as the PeopleSoft leadership. Oracle should instead focus on its next stage of building its service-oriented strategy with a combination of innovation and organic growth."

At issue is the role of enterprise resource planning (ERP) tools -- Human Resource Management or Financial Management Services and how they relate to Oracle's traditional database products. No one, not even the U.S. Department of Justice, denies that SAP AG is the leader in the marketplace.

Oracle's argument, that the ERP definition is too narrow, must be widened to include Microsoft and IBM as well as Fidelity and Ceridian, according to Josh Wenderoff, a consultant for Oracle.

"Both of these companies are outsourcers like ADP and they compete head-to-head with Oracle, PeopleSoft and SAP, not to mention Lawson, SSA Global and Microsoft," Wenderoff said. "CKE was using PeopleSoft until it decided to outsource to Ceridian. And Fidelity, which uses its own proprietary software, is replacing Exult Inc., another outsourcer that uses PeopleSoft."

Courtroom Strategy

Oracle CEO Larry Ellison and PeopleSoft CEO Craig Conway are both expected to take the stand. Court documents filed Wednesday suggest Conway will be available June 29th and 30th for his estimated six-hour session with Oracle lawyers.

The DoJ is expected to call representatives with the State of North Dakota as well as officials from Erie County, New York to talk about the impact of an Oracle/PeopleSoft merger on their economies. The government is also scheduled to talk to Douglas Burgum, a senior vice president with Microsoft Business Solutions, who knows the Redmond, Wash.-based firm's ERP lines as well as its CRM applications.

Oracle is going for the jugular in asking IBM's Steve Mills, the senior vice president and group executive in charge of IBM's $14 billion software business to talk about the company's strategies when it comes to database, application, integration layer, and stack positioning. Oracle is also planning on calling Microsoft's Cindy Bates, who helps run the company's Small and Midmarket Solutions & Partners Group.

Both the DoJ and Oracle have spent the last few days hoping to exclude potentially damaging witnesses or evidence. Last week, the court approved a government request to suppressing "evidence, testimony, or argument at trial, hearing of any motion relating to Rdb Database," a company Oracle purchased the software division from Digital Electronics back in 1994.

Oracle retaliated by successfully excluding DaimlerChrysler executive Michael Gorriz, a close partner of Oracle.

"The toughest thing for Oracle will be to tell a compelling story predicting net improvement in competition, consumer choice and consumer satisfaction if it acquires PeopleSoft," said Rob Christopher, head of litigation for law firm Coudert Brothers' northern California division.

"At a minimum, that will require convincing the court that the relevant market is broadly defined, and that Oracle is competitively disadvantaged due to economies of scale or other considerations enjoyed by its larger European rival. That is a difficult task to perform without contradiction when also arguing, presumably, that existing smaller companies in the market are viable competitors whose presence assures future innovation and lower market concentration."

Oracle's likely argument -- that barriers to entry facing other major companies are quite low -- is not likely to be persuasive, Christopher said. The enterprise software market, however defined, is not brand new, and does suffer from relatively high concentration in just a few sellers, he added. "Finally, Oracle must tell the court to disregard completely the DoJ's likely evidence about Oracle's actual plans and intentions in pursuing PeopleSoft, which is a bit like the Wizard of Oz telling Dorothy to ignore the man at the microphone behind the curtain."

For its part, Christopher said, the DoJ's toughest task will be to justify preventing a company from becoming a more effective competitor against a dominant rival.

"Throw in the politically incorrect, but possibly influential distinction (compared with the Staples/Office Depot situation a couple years back) that the applicant now is an American company and the dominant rival is European, and there could be a judicial perception that this move would be net pro-competitive"

Christopher said the judge may look at the power of threes, particularly as it applies to competitive dynamics in otherwise relatively concentrated markets.

"I do not expect the court to disrupt that magic here. My money is on the DoJ," Christopher said.

Melanie Hollands, president of Koala Capital, a hedge fund that focuses on technology stocks, agrees that Oracle's chances of completing its takeover bid are slim, but emphasizes that stockholders will have the final say.

"From a shareholder value perspective it could be argued that the deal should get done," Hollands told internetnews.com.

"On the basis of PeopleSoft's business fundamentals, I don't think PeopleSoft stock is worth the current bid amount of $21 [per share]. Maybe $14, $15, $16 tops, but not $21. Perhaps PeopleSoft shareholders will see the greatest value to themselves lying with approving Oracle's (albeit lowered) $21 per share bid. Considering PeopleSoft shares are trading in the mid-$17s, I think if you are a major shareholder and you don't go for the Oracle deal then from a purely financial perspective you should have your head examined."