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Court Clash Looms for DOJ, Oracle

Analysis: When DoJ Assistant Attorney General R. Hewitt Pate announced his intentions to block Oracle's $9.4 billion bid for applications rival PeopleSoft, it marked the next turn on what could be a long path to redefining the enterprise software market.

Now that Oracle has vowed to take the Department of Justice head on, the handicapping and analysis of Oracle's next moves are underway.

Oracle has claimed the DoJ's decision is based on a limited view of competition in the applications market, where companies and government agencies are seen as relying on Oracle, PeopleSoft and market leader SAP to automate their business processes -- especially human resources and finance applications for large enterprises.

Now DoJ and Oracle are headed for a court showdown. The DoJ must prove that it is fair and accurate to define the market as dominated by three large enterprise application companies. Oracle is expected to argue that there are several powerful players beyond the big three that are often cited, as well as mid-tier players that also provide business customers with choice.

Robert Christopher, an attorney specializing in litigation on antitrust for technology companies for Coudert Brothers in Palo, Alto, Calif., described Pate's decision as "one nail in the coffin" but said Oracle has options. Oracle could have attempted to bargain with the DOJ in order to get Pate to withdraw his decision, he said, although the company now clearly it intends to go to war with the DoJ.

"The DoJ will have to go to court to get a preliminary injunction to stop the acquisition process unless something was worked out, or Oracle withdrew its tender offer," which doesn't appear likely, Christopher told internetnews.com. "So it's on to the next round."

Christopher said Oracle would then oppose the DoJ's motion, and then a flurry of court appointments could ensue for both parties. To get the DoJ's injunction enjoined, Oracle would have to prove there was an appreciable change in the line of commerce relative to the market.

But it's important to note, Christopher said, that now that the DoJ and Oracle have by default agreed to meet in court, that it is out of their hands, and into those of the court. The judge the litigants draw could have a profound effect on the merger too, and the case could drag on for months.

Oracle and the DoJ will meet in the U.S. District Court in San Francisco. While Pate said on a conference call Thursday that such major antitrust cases are often held in Washington, D.C., the fact that both Pleasanton-based PeopleSoft in Redwood Shores-based Oracle are both from California makes the Bay area court a logical venue to commence litigation.

Experts question Definition of Apps market

Mike Dominy, analyst at the Business Applications & Commerce practice at The Yankee Group, said he was surprised not to hear any counterproposals from Oracle. Dominy has said Oracle might improve its position with the Do if it offered to purchase PeopleSoft and subsequently divest the J.D. Edwards portion of its rival. PeopleSoft acquired J.D. Edwards for $1.75 billion in July.

"From my perspective, going to court and dragging the process doesn't do anybody let alone Oracle any good," Dominy told internetnews.com.

While Dominy doesn't think Oracle should prevail, he admitted the logic the Do is using to define the market is curious. As an analyst who covers the space, Dominy said that arguing that there are three major players in the enterprise applications market is difficult.

Research firms typically look at small business, mid-range and large enterprise customers, all of whom are usually served by a variety of applications rivals. But while some lead in human resources management (HRM) applications, others might be strong in enterprise resource planning (ERP) software.

"Who you define as a customer, how many apps do they make and what functionality do they have?" Dominy said. "Where do you draw the line between who is competing and who is not? What about SSA Global or Lawson, which make millions in revenues and have thousands of customers? This simplicity is not doing justice to the issue."

Ken Marlin, a mergers and acquisitions investment banker with specialist advisory firm Marlin & Associates, who has continually supported Oracle's purchase, agreed and suggested ways for Oracle to fight the DOJ. "He called the DOJ's reason for contesting the purchase a "significant broadening of the definition of what constitutes an anticompetitive combination."

Marlin said Oracle could even try to lobby Congress to amend the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 on the grounds that the DoJ's definition is too broad an interpretation of laws that were written to protect competition in free markets.

But Christopher noted that the way the DoJ has defined the relevant market is based on a fundamental objection.

"It's unlikely that a proposed change by Oracle can circumvent the DOJ's argument," Christopher said. "It's much easier for two companies to keep tabs on each other's moves. By reducing the number from three to two you will effectively have a reduction in competition. When it comes to price there would be one less player so the two might raise their fees and there would be one less innovator on the market," he added.

"I think Oracle will be wasting millions of dollars to fight because Oracle needs to win in both forums -- the DOJ and EC -- to succeed," he said. "It's not an easy task."