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Oracle Wants CAP Ripped From PeopleSoft

Lawyers for Oracle asked a federal court to remove one of the last few obstacles in the company's hostile $7.7 billion bid for PeopleSoft .

Oracle's lawsuit, filed in Delaware, claims PeopleSoft's Customer Assurance Program (CAP) and subsequent "poison pill" provisions are unlawful. The CEO at the time, Craig Conway, misled investors and sheltered his own board into believing that "there is no condition" under which PeopleSoft would ever be acquired by Oracle, the suit contends.

PeopleSoft's Board of Directors has since fired Conway and replaced him with company founder and Chairman Dave Duffield.

Oracle claims PeopleSoft's board did not review the CAP plan and that Conway kept a tight control over the Board's advisement attorneys and bankers. According to court documents, there were more than $2 billion in CAP contracts as of June 30, 2004.

Launched in June after Oracle bid for PeopleSoft, CAP was designed as a protection for customers and PeopleSoft in the face of a hostile takeover. The program guarantees refunds of two to five times customer licensing fees if the company changes hands and certain conditions are not met. The case was postponed to allow the U.S. Department of Justice to proceed with its antitrust suit. A federal judge dismissed the case last month. On Friday, the DoJ said it would not appeal the judge's decision.

The Redwood Shores, Calif.-based database software vendor is currently offering $21 per share, or $7.7 billion, to acquire its rival. Financial analysts suggest that Oracle will have to raise its bid to as much as $26 per share for PeopleSoft in order to entice its shareholders to vote for the deal. Shares of PeopleSoft closed Monday at just over $22.

While the CAP was designed to protect PeopleSoft customers in an acquisition, some analysts believe the CAP is likely to reduce the amount that an acquiring company would be willing to pay to the PeopleSoft stockholders.

"Speculation has been rife that Conway was fired due to his opposition to the bid," Melanie Hollands, president of Koala Capital, a hedge fund that focuses on technology stocks, told internetnews.com. "However, when he was fired PeopleSoft said that it had lost confidence in him as CEO, despite the fact that management also disclosed that sales of PeopleSoft's new software licenses for the current quarter were (so far) higher than expected."

PeopleSoft issued a statement Monday saying it expects total license revenues in the range of $155 million to $165 million with total revenue to be in the range of $680 million to $695 million.

"The customer assurance program can be addressed as long as Oracle continues to support PeopleSoft products adequately," Yankee Group analyst Mike Dominy told internetnews.com. "Oracle must outline a plan that shows how PeopleSoft customers will be cared for so that the CAP cannot be triggered."

Dominy also points out that the CAP has a limited timeframe on it and can be rendered inactive, "If the company acquiring PeopleSoft is welcomed (a 'friendly' deal) by PeopleSoft."

Even if it manages to remove PeopleSoft's CAP refund, Oracle's pursuit faces other hurdles, including a pending antitrust investigation by overseas regulators with the European Commission.