PeopleSoft/J.D. Edwards Facing Challenges

When PeopleSoft
moved to acquire
rival J.D. Edwards
Monday, it marked the latest in a series of mergers between software
vendors, but it also jogged the competitive landscape in the market for
selling business application software to customers.

Analysts said that while the deal presents a significant upside for
PeopleSoft, J.D. Edwards and their customers, who will be able to get more
applications from one vendor, it also presents major challenges for the two
rivals to integrate partners, products and existing infrastructures. And despite the merger, Germany’s SAP is still the largest business application
vendor — by a long shot.

The play and the field

Pleasanton, Calif.’s PeopleSoft, which competes on various levels with SAP,
Oracle , Siebel
and Microsoft in the market for
selling software for enterprise resource management and human resource
management, will gain new access to mid-market customers
looking for supply chain management applications, which is Denver-based
J.D.Edwards’ specialty.

Business software providers often target small, medium and or large classes
of businesses. As a provider of software for large-scale firms, PeopleSoft
could very well become SAP’s greatest competitor. Oracle covers a lot of
ground in the high-end and mid-market application space, as does Siebel.
Microsoft tends to sell to the small- and mid-sized market.

PeopleSoft bases a number of applications for CRM, enterprise resource
planning (ERP) and supply chain management (SCM) on its flagship
Internet-based platform, PeopleSoft 8, which lets an enterprise combine
online transactions with customers, suppliers, and employees. J.D. Edwards’
5 suite provides the infrastructure for its collaborative enterprise
applications, spanning CRM, SCM, ERP and others. The toolset gives a
business the ability to use and change J.D. Edwards software to keep its
technology in step with business requirements.

PeopleSoft President and CEO Craig Conway discussed the deal, made for $1.7
billion in stock, in a conference call Monday.

“This merger cannot be more compelling,” Conway said. “This is one of the
most natural and compelling acquisitions in the software industry.”

In a question and answer session after the details were revealed, Conway put
down speculation that the merger will pose problems because of the
oft-difficult task of integrating competing businesses with overlapping
products, as well as difficulties with corporate culture conflicts. Conway
said the integration would be synergistic and claimed the cultures were
similar.

“Many large mergers have had problems because there were flaws in the
businesses, or there were no clear product synergies or coordinated
management teams,” Conway said. “PeopleSoft and J.D. Edwards are both
successful, profitable businesses. We’ve continued to accelerate growth and
by combining our strengths hope to produce a strong product set.”

Analysts agreed the news bodes well for PeopleSoft, who is looking to cover
more ground in the mid-market. Jon Derome, program manager of the Business
Applications & Commerce unit at the Yankee Group, said one upside to the
deal for PeopleSoft is solid customer acquisition credibility from J.D.
Edwards. He said PeopleSoft has strong HRM and financial applications it can
offer to J.D. Edwards customers, while J.D. Edwards can hawk its asset and
manufacturing applications to PeopleSoft customers. With the new, integrated
sales force working together, the firm could fill in holes the vendors had
as separate entities.

The challenges

However, while the deal provides definite synergies between two leading
vendors, Derome said there are certain challenges the two must reconcile.
One of those, he said, is how to migrate J.D. Edwards installed customer
base and products from its AS400-based platform (now rendered as IBM’s
iSeries midrange servers), an antiquated system he dated to the previous
Bush administration, to PeopleSoft’s Web-based infrastructure. Going from
one code base to another will also be challenging.

Gartner Principal Analyst Ted Kempf said any integration of two like
companies is going to be complicated, but it “definitely can happen. They
need to keep their eye on both the implementation of new partners and
channels, as well as their applications, so they don’t lose customers.”

Paul Hamerman, a director at Forrester Research, said that while there are
definite synergies as a byproduct of this purchase, there are significant
product overlaps because both firms sell CRM, financial, HR, manufacturing
and supply chain software.

“I just don’t think it’s as easy as they made it sound,” Hamerman told
internetnews.com. “The company is going to have to rationalize the
product lines and they need to look at at the technology architectures of
the different product lines to make them work together.”

Participants on the conference call also asked the parties if they were
concerned about clashing corporate cultures. Conway demurred, but Hamerman
thinks this too is a legitimate concern.

“I don’t buy that at all,” he said. “PeopleSoft used to be about the
customer, but they have become much more corporate-oriented since Conway
moved in there.” Hamerman acknowledged that J.D. Edwards may be leaning that
way, with the addition of Chairman, President and CEO Bob Dutkowsky.

The competition and the market

Neither Oracle nor Siebel would comment for this story, so what can the IT world expect from the competition’s reaction? Probably not much, if it’s concerned about what SAP thinks. Though Derome thinks SAP’s growth potential could be threatened by moves like the PeopleSoft/J.D.
Edwards merger in three to five years, Hamerman said even with this
purchase, SAP’s licensing revenues are greater than those of the other major
vendors put together. That includes PeopleSoft, J.D. Edwards, Oracle and
Siebel. Still, Hamerman was loathe to call PeopleSoft the No. 2 business
application vendor to SAP when Oracle is worth $10 billion with 27 percent
of its revenues derived from its business applications. He suggested
PeopleSoft shares that slot with Oracle and Siebel because SAP is so
dominant. As PeopleSoft’s arch-rival, Oracle would seem to be the most
threatened, Hamerman said.

Kempf agreed.

“When you have two strong companies merge, it’s going to raise everybody’s
eyebrows,” Kempf told internetnews.com. PeopleSoft is looking to get
its ducks in a row. Two strong companies that raise everybody’s eyebrows.
There will be new forms of competition from different applications. For
example, if Oracle was not worried about their financial applications for
the midmarket, maybe they are now.”

Hamerman said the deal is being done at a time when the market for
enterprise applications has matured and declined, when the No. 1 vendor
gains at the expense of the consolidation of others. Going forward, he and
Kempf expect additional consolidation at the mid-market level, and for
larger vendors to pick off smaller ones with the goal of gaining more market
share in that segment.

To be sure, Invensys plc sold its Baan subsidiary to an investment group consisting of Cerberus Capital Management, L.P. and General Atlantic Partners, LLC, for $135 million.