Deadline Dwindling for Oracle Merger Quiz

As the Oracle/PeopleSoft war of words and allegations wears on, Monday is
the deadline for the U.S. Department of Justice (DOJ) or Federal Trade
Commission (FTC) to request a secondary request for information from Oracle ,
which is seriously pursuing a hostile merger with PeopleSoft for an estimated $6.3 billion.

This past week has been relatively quiet in the sense that there have been
no legal filings or ramped up suits from PeopleSoft, who is trying to fend
off Oracle, which said it is intent on becoming the No. 2 enterprise
applications vendor to SAP .

Oracle meanwhile has softened its stance a bit, dropping its condition that
PeopleSoft not alter its bid for mid-market applications vendor J.D.
Edwards. This was somewhat anticlimactic as PeopleSoft had already raised
its bid from $1.7 to $1.75 billion. From its AppsWorld show in London, the
Redwood Shores, Calif. outfit also said it would consider purchasing J.D.
Edwards as well as PeopleSoft. Such a move would make it a powerful
competitor to SAP, while at the same time keeping Microsoft’s rising
applications star at bay.

But PeopleSoft hit hard a couple weeks back when it said it objected to the
deal in great part because of regulatory issues, ostensibly raising the
specter of possible antitrust violations. The Pleasanton, Calif. vendor
vehemently argued Oracle would eliminate its business, hurting customers in
the process.

“Oracle’s true intent in making the tender offer was to undercut
PeopleSoft’s business operations by disparaging PeopleSoft’s products,
services, and future prospects, undermine PeopleSoft’s viability by creating
uncertainty and doubt in the minds of PeopleSoft’s customers and prospective
customers, and interfere with PeopleSoft’s plan to merge with J. D. Edwards
and Company,” PeopleSoft alleged in a filing. “PeopleSoft also alleges that
Oracle’s accompanying media campaign grossly misleads the market concerning
Oracle’s ability to provide continuing support to existing PeopleSoft
customers, and fails to disclose the substantial obstacles and costs facing
PeopleSoft customers that would need to migrate to an Oracle platform.”

“Considering the high-profile nature of this transaction and the fact that the Department of Justice just received the case less than two weeks ago, we fully expect to receive a second request,” said Jim Finn, an Oracle spokesman. “We remain very optimistic that DOJ will conclude that this transaction isn’t anticompetitive and that we will complete the transaction in a timely manner.”

When one considers the controversy Oracle raised with its bid and PeopleSoft’s reaction, there isn’t a straighter line for the consideration of the possibility of antitrust violations.

Rob Christoper, an attorney at Coudert Brothers in Palo, Alto, Calif.,
specializes in litigation on intellectual property, antitrust and general
business disputes for technology companies and financial institutions, among
other fields. Christopher said he thinks it is highly likely the DOJ or FTC
might issue a secondary request for information on Oracle’s bid.

He compared it to the government intervention of the Staples/Office Depot
merger in 1997, when the FTC voted 4-1 to kill the merger, which would have
married two of the most powerful entities in the office supply space,
creating a $10 billion company. Sure, the two said the merger would drive
down product prices, but the FTC disagreed.

“This sounds or smells like the Staples/Office Depot merger that the
government ended up halting a few years back,” Christopher said. “There are
a lot of smaller companies that sell office equipment that would have been
hurt.”

But in the Oracle/PeopleSoft case, Christopher said, the DOJ and FTC are
going to look at how the Oracle bid for PeopleSoft will truly benefit the
customer more closely than how it might hurt other companies in the
multi-tiered space. Christopher doesn’t think Oracle has done that
adequately enough. And although Oracle has certainly softened its stance by
offering to support PeopleSoft products in the future and waive certain
conditions, Christopher doesn’t buy it.

“Talk is cheap,” Christopher said. “I’m going to go by what they said at the
outset, which was that they would stop making PeopleSoft products and help
customers migrate to their software. That might be the most telling evidence
the regulatory bodies have to go by. I don’t care how much they’ve softened
their stance since then. Who’s to say they won’t turn around and discontinue
PeopleSoft products if the merger went through?”

“On the other hand, one could argue that there would not be a significant
impact — that Oracle is filling a void by buying PeopleSoft,” Christopher
said, playing devil’s advocate to his gut feeling. “There is merit to that.
It’s such a dynamic industry.”

Attorney Ken Marlin, who runs high-tech consultancy firm Marlin & Associates
in New York City, doesn’t think PeopleSoft has an argument about antitrust
issues. He simply feels the market is too broad for the DOJ or FTC to say
that Oracle is dipping into the antitrust sea, which though somewhat new to
high-tech, has certainly washed over Microsoft in the last few years. But
that Redmond, Wash. software giant is still standing tall, even if it did
take its lumps in the media. Most recently, it scored a key
victory in court to keep Java out of Windows.

“I think that there is a common misconception amongst lay people that the
business definition of antitrust can be narrowly defined to those firms who
provide similar products,” Marlin said. “This may not be the way the Justice
department defines the market. The Justice Department will look at other
people who provide enterprise application software currently, or who could,
or are likely to, such as Microsoft, and I think they will see a very large
market that is highly-fragmented. When one looks at the total size of the
market concentration and looks at how that concentration will change as a
result of transaction, I don’t think they will find cause for antitrust.”

But Christopher said the regulatory bodies will look to see if there “is an
improvement in consumer welfare.”

“That is the principle goal under antitrust laws,” Christopher said. “What’s
going to happen here is a determination by the Justice Department or FTC —
and it is usually one of them who will take the lead on this — is if there
is a certain gain in operating efficiency. If they can’t find that, they
might see it as a move by Oracle to eliminate its major competitor in the
enterprise software arena.”

Christopher said certain actions may steer the regulatory bodies toward
asking for more info, particularly Connecticut’s suit against Oracle for
antitrust activities. He said this is because Connecticut, as a customer of
PeopleSoft, feels threatened. Moreover, several other states attorneys
general, including those of Texas, Massachusetts and California, have spoken
via conference call to discuss similar actions this week.

“They fear the elimination of products and services,” Christopher said.
“That makes me think that the DOJ or FTC might pay attention to this. If I’m
the DOJ or FTC, I’m going to ask Oracle for internal documents. I want to
know how they perceive the market and how just how broad it is. I might ask
‘What is truly the relevant product market? Does Oracle see this as a move
to consolidate a market?’ And I would expect Oracle is prepared to deal with
that. The toughest issue is always product analysis. Either they’ll see that
Oracle perceives the market as a small number of companies that generates
the majority of revenue in this space, or a large number of companies with
different percentages of market share. Obviously, they want to convey the
attitude that they see the market as the former as opposed to the latter.”

If there is one thing that Christopher and Marlin are in agreement on, it’s
that the if neither the DOJ nor the FTC do request additional information
from Oracle, it signals that they are not concerned that Oracle is in danger
of violating antitrust laws such as the Clayton Act.
That could open the floodgates for Oracle to bear down on PeopleSoft, and
give the board and its shareholders the full court press until they
capitulate.

In that event, the legal experts say, all bets are off. Marlin said there is
an outside chance IBM could come to PeopleSoft’s rescue — in a sense it
would be protecting its own investment with its deep partnership with
PeopleSoft — but he said this is unlikely. And IBM has not spoken publicly
about what it calls a “rumor.”

“IBM is big enough and they might like the White Knight label,” Marlin said.
“But there is no indication of them doing it.”