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Oracle Prevails in DoJ Suit to Block PeopleSoft

A federal judge has ruled in Oracle's favor in a lawsuit by the Department of Justice that sought to block the company's $7.7 billion hostile takeover bid for PeopleSoft , a rival database software provider.

U.S. District Court Judge Vaughn R. Walker said the DoJ had not proven in its suit that the takeover would harm competition in the market for certain enterprise software applications.

"Plaintiffs have proven that the relevant product market does not include incumbent systems or the integration layer," Walker's decision said. "But plaintiffs failed to prove that outsourcing solutions, best of breed solutions and so-called mid-market vendors should be excluded from the relevant product market. Furthermore, plaintiffs have failed to establish that the area of effective competition is limited to the United States."

The DoJ now has 60 days in which to appeal the judge's ruling.

Oracle said the decision removes a significant roadblock to the acquisition.

"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," Oracle's Chairman Jeffrey Henley said in a statement. Henley was referring to PeopleSoft's maneuvers to thwart the takeover with provisions that could make a buyout more expensive for Oracle.

R. Hewitt Pate, Assistant Attorney General in charge of the Department's Antitrust Division said the Department is now considering its options.

"We are disappointed in the Court's decision," Pate said in a statement. "We believe the facts and evidence in this case support our position that Oracle's proposed acquisition of PeopleSoft would result in a substantial lessening of competition in the markets for high function Human Resources Management and Financial Management Systems software."

A statement from PeopleSoft was not immediately available.

The decision by judge Walker essentially contradicted an antitrust lawsuit filed by the U.S. Department of Justice and 11 state attorneys general. After a month full of testimony, the judge took an additional four weeks to draft his decision. PeopleSoft lawyers are expected to appeal the decision.

The government's case tried to prove that the hostile takeover would limit customer choices to just Oracle and market leader SAP AG creating a monopoly in the enterprise resource planning (ERP) market. Those tools include Human Resource Management and Financial Management Services. Throughout the trial, Judge Walker questioned the DoJ's position while analysts criticized the government for oversimplifying the definition of top-tier and mid-tier ERP players.

Oracle refuted each claim arguing that the government's ERP definition is too narrow and must be widened to include Microsoft and IBM , as well as Lawson, Fidelity Employer Services Company (FESCo) and Ceridian. Redwood Shores, Calif.-based Oracle boosted its position by calling several high-profile witnesses including CEO Larry Ellison. The company also went for the jugular placing rivals on the stand like IBM Steve Mills, the senior vice president and group executive in charge of IBM's $14 billion software business; 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; and Richard Knowles, vice president of operations at SAP America.

But despite the best efforts to pry away from the DoJ's antitrust claims, Oracle's attempt to take over PeopleSoft still faces many hurdles, including PeopleSoft's shareholder rights "poison pill," PeopleSoft's Customer Assurance Program, and a potential antitrust challenge from the European Commission (the regulatory body of the European Union).

A Trial with Many Twists

The trial itself took several twists and turns from the very first day, including the revelation that Microsoft was embroiled in a $65 billion plan to acquire SAP as early as this year.

Court testimony revealed that the Microsoft/SAP merger was hatched after Microsoft chairman Bill Gates found out that Oracle wanted to purchase PeopleSoft. The chairman and Chief Software Architect immediately fired off an e-mail to Microsoft's Steve Ballmer asking the CEO to consider taking a financial stake in Pleasanton, Calif.-based PeopleSoft or acquiring SAP. Outside of the courtroom, Microsoft acknowledged that it initiated preliminary discussions with the Waldorf, Germany-based ERP leader but has since dropped the issue.

Oracle's acquisition plans even caused IBM to blink. Court testimony uncovered a memo implying that Big Blue was fearful enough of an Oracle/PeopleSoft merger that it considered launching a "campaign of FUD" (fear, uncertainty and doubt) against Oracle. The tactics included IBM support of PeopleSoft through a blanket of analyst, press, customer and regulatory authority statements.

A separate memo suggested that IBM consider acquisitions of middleware companies as a counterstrike to help prevent Ellison and Co. from edging into the competitive mid-market. In another chart titled "Predators' Ball," IBM looked at acquiring Oracle and SAP and even Microsoft.

Oracle was not immune to controversy during the trial. While on the stand, Oracle's Larry Ellison recounted his conversations with PeopleSoft CEO and former Oracle executive Craig Conway. The exchange with DoJ lawyers solidified Ellison's take-no-prisoners attitude as he and Conway voraciously disagreed on whom should run the company.

Ellison also revealed Oracle's consideration for three or four other acquisitions of unnamed public companies including one that specialized in business intelligence software, a pure software application company and a middleware infrastructure company.

During earlier trial evidence in the form of videotaped testimony, Ellison recounted some of the rationale to acquire not only PeopleSoft but as many as eight different acquisition targets, including Siebel and Lawson, which approached Ellison separately with their own acquisition proposals and J.D. Edwards (eventually acquired by PeopleSoft).

Government testimony also revealed Oracle's aggressive business practices when it comes to giving discounts to undercut the completion. Conversations between Oracle's inner circle and its advisors highlighted Oracle's discount ticket procedures and its trademark practice of undercutting PeopleSoft's offers to customers to "lowball the price to nowhere."

In a surprise move, Oracle's lawyers dropped its plan to call PeopleSoft's Conway to the stands. Defense lawyers had initially set aside six hours to interrogate PeopleSoft's CEO but cancelled the appearance at the last second. Oracle's lawyers said by the time Conway would have appeared, they felt comfortable enough in their arguments. Analysts surmised that Oracle might have been too afraid of what Conway would say to injure Oracle's business.

Third Parties Sought Trade Secret Protection

One of the more controversial issues surrounding the DoJ's antitrust case was the use of testimony by third party corporations.

Some 33 different clients, rivals and entities helped the DoJ present its case against Oracle.

Early on, Judge Walker said in the pretrial hearing that Oracle's two in-house lawyers should not be "handicapped" in viewing the evidence presented by the DoJ.

He later noted several times that Oracle, the DoJ and some third-party vendors significantly "over-designated" documents as confidential without the proper procedure.

SAP ended up holding back about 5 percent of the 81,000 documents it has handed over to the DoJ. Microsoft filed similar paperwork requesting similar protections saying about 1,000 of its files are too sensitive for even Oracle's lawyers to view.

Ultimately, former U.S. District Judge Charles Legge held talks with the third-party groups during the trial to hammer out their concerns and give recommendations on how companies wanted to deal with the sensitive issues.

Ironically, Oracle was also silenced about a its own past acquisition experience with a database company.

A meeting between the judge and lawyers for both sides turned into a situation where Judge Walker took a case-by-case basis to decide what corporate information would be declassified.