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Oracle May Get Wiggle Room from DOJ

Oracle's revised $26 per share offer for rival PeopleSoft makes it difficult for investors to turn down, and could lead to a divestiture of J.D. Edwards should the deal meet regulatory approval, an analyst at a research firm said this week.

Mike Dominy, analyst with the Business Applications & Commerce practice at The Yankee Group, said Oracle's latest bid, an 18.8 percent premium that saw the purchase price for the applications maker balloon from $7.5 to $9.4 billion, will force investors to strongly consider the offer.

It also puts pressure on PeopleSoft's board going into the March 25 shareholders meeting because it now has to seriously consider its fiduciary responsibilities to those same shareholders, the analyst said.

Dominy outlined a few scenarios for how Oracle's hostile takeover attempt might shake out in a recent conversation with internetnews.com. Much is contingent on the DOJ's decision, which Oracle says will be handed down before March 12.

"The most important issue at this point is the DOJ ruling," Dominy said. "The DOJ must give Oracle room to maneuver."

In relatively straightforward scenarios, the DOJ could grant the acquisition its blessing or deny it, in which case Redwood Shores, Calif.'s, Oracle would have the opportunity to appeal, negotiate or litigate. In any of those actions, the battle would carry on.

Where it gets a little fuzzy and interesting is that the DOJ could authorize the deal, but force the divesture of J.D. Edwards, which PeopleSoft acquired in July, to a competitor in the enterprise resource planning (ERP) or customer relationship management (CRM) market.

Dominy said he thinks Oracle may think about it and ultimately agree to level the playing field somewhat in the ERP space. Germany's SAP is the clear "gorilla" of the market with an $8 billion share; Oracle would be the No. 2 player if its bid for PeopleSoft rings true.

After that, the gulf between the competition is wide, so Dominy thinks the DOJ might ask Oracle to spread around the wealth a bit and give up J.D. Edwards.

Dominy said it makes sense that the J.D. Edwards ERP assets, mostly geared toward the mid-tier market, might be purchased by ERP applications provider SSA Global, which has been on an acquisition binge of late, scooping up Baan and EXE Technologies.

"It would not shock me if the DOJ allows the merger but stipulates that Oracle must divest certain assets to ensure competition in the market," Dominy said. "There are several companies that could benefit from that type of ruling. My hunch is the J.D. Edwards portion of PeopleSoft would be targeted for divestiture and the most likely buyer for that business at this point would be SSA. Bringing JD. Edwards into SSA would make SSA a $1.4 to $1.8 billion company and a true competitor."

Even more telling, perhaps, is that Dominy said Oracle may not want J.D. Edwards because the company's software is designed to run on IBM's AS/400 server systems. Since Oracle's own software competes with IBM products, it makes sense that the database maker might have a sour taste in its mouth at the prospect of integrating J.D. Edwards.

"I don't know what else could stop this deal from happening," Dominy said. "From a business perspective, the market has been maturing and consolidating for some time."

Of course, Oracle has other obstacles, too. Despite its increased pressure on the PeopleSoft board, Dominy said it must convince investors to elect new board members and pressure the new board to amend the poison pill, which "makes a truly hostile takeover too expensive." Oracle is currently pushing to change the make-up of the company's board.

Lastly, Dominy said Oracle must somehow work around or defeat PeopleSoft's customer protection program, which calls for customers to receive compensation of between two and five times their licensing fees should the company's management change hands.

"If PeopleSoft's management team is a willing participant in the acquisition, the combined party will need to either find a loophole in the program language or get customers to agree to waive some of their rights outlined in the program," he said.

In any case, Dominy agreed the battle is hurtling toward some crucial deadlines in the next month or two.



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