Oracle, DoJ Gird For Legal Battle

One year ago, PeopleSoft was happily preparing
for
its acquisition of J.D. Edwards, when Oracle dropped a
bombshell
in the form of a hostile takeover.

The year that followed highlights just how the two companies and the
two
men that run them are struggling with the changing market for enterprise
software.

Now, Oracle is preparing to defend itself against the U.S.
government’s anti-trust lawsuit that looks to prevent the $7.7 billion
hostile takeover from happening. Even if the Redwood Shores,
Calif.-based
database giant survives the legal battle, it may still face European
regulators and a nasty proxy war from PeopleSoft shareholders.

“Obviously this deal will not work if the Justice Department can win
its
case,” Jay Desai, CEO and Founder of industry think tank Institute of
Global
Competitiveness, told internetnews.com. “Even then, I give this
acquisition a less than 5 percent chance of happening. There are too
many
other obstacles in the way, such as the PeopleSoft leadership. Oracle
should
instead focus on its next stage of building its service-oriented
strategy
with a combination of innovation and organic growth.”

At issue is the role of enterprise resource planning (ERP) tools —
Human
Resource Management or Financial Management Services and how they
relate to
Oracle’s traditional database products. No one, not even the U.S.
Department
of Justice, denies that SAP AG is the leader in the
marketplace.

Oracle’s argument, that the ERP definition is too narrow,
must be widened to include Microsoft and IBM as well as Fidelity and
Ceridian, according to Josh Wenderoff, a consultant for Oracle.

“Both of these companies are outsourcers like ADP and they compete
head-to-head with Oracle, PeopleSoft and SAP, not to mention Lawson,
SSA
Global and Microsoft,” Wenderoff said. “CKE was using PeopleSoft until
it
decided to outsource to Ceridian. And Fidelity, which uses its own
proprietary software, is replacing Exult Inc., another outsourcer that
uses
PeopleSoft.”

Courtroom Strategy

Oracle CEO Larry Ellison and PeopleSoft CEO Craig Conway are both
expected to take the stand. Court documents filed Wednesday suggest
Conway
will be available June 29th and 30th for his estimated six-hour session
with
Oracle lawyers.

The DoJ is expected to call representatives with the State of North
Dakota as well as officials from Erie County, New York to talk about
the
impact of an Oracle/PeopleSoft merger on their economies. The
government is
also scheduled to talk to Douglas Burgum, a senior vice president with
Microsoft Business Solutions, who knows the Redmond, Wash.-based firm’s
ERP
lines as well as its CRM applications.

Oracle is going for the jugular in asking IBM’s Steve Mills, the
senior
vice president and group executive in charge of IBM’s $14 billion
software
business to talk about the company’s strategies when it comes to
database,
application, integration layer, and stack positioning. Oracle is also
planning on calling Microsoft’s Cindy Bates, who helps run the
company’s
Small and Midmarket Solutions & Partners Group.

Both the DoJ and Oracle have spent the last few days hoping to
exclude
potentially damaging witnesses or evidence. Last week, the court
approved a
government request to suppressing “evidence, testimony, or argument at
trial, hearing of any motion relating to Rdb Database,” a company
Oracle
purchased the software division from Digital Electronics back in 1994.

Oracle retaliated by successfully excluding DaimlerChrysler
executive
Michael Gorriz, a close partner of Oracle.

“The toughest thing for Oracle will be to tell a compelling story
predicting net improvement in competition, consumer choice and consumer
satisfaction if it acquires PeopleSoft,” said Rob Christopher, head of litigation for law firm Coudert Brothers’ northern California division.

“At
a minimum, that will require convincing the court that the relevant
market
is broadly defined, and that Oracle is competitively disadvantaged due
to
economies of scale or other considerations enjoyed by its larger
European
rival. That is a difficult task to perform without contradiction when
also
arguing, presumably, that existing smaller companies in the market
are viable competitors whose presence assures future innovation
and lower market concentration.”

Oracle’s likely argument — that barriers to entry facing other major
companies are quite low — is not likely to be persuasive, Christopher
said. The enterprise software market, however defined, is not brand
new, and does suffer from relatively high concentration in just
a few sellers, he added. “Finally, Oracle must tell the court to disregard completely the
DoJ’s likely evidence about Oracle’s actual plans and intentions in pursuing
PeopleSoft, which is a bit like the Wizard of Oz telling Dorothy to
ignore
the man at the microphone behind the curtain.”

For its part, Christopher said, the DoJ’s toughest task will be to
justify preventing a company from becoming a more effective competitor against
a dominant rival.

“Throw in the politically incorrect, but possibly influential
distinction
(compared with the Staples/Office Depot situation a couple years back)
that
the applicant now is an American company and the dominant rival is
European,
and there could be a judicial perception that this move would be net
pro-competitive”

Christopher said the judge may look at the power of threes, particularly
as it applies to competitive dynamics in otherwise relatively concentrated
markets.

“I do not expect the court to disrupt that magic here. My money is
on the
DoJ,” Christopher said.

Melanie Hollands, president of Koala Capital, a hedge fund that
focuses
on technology
stocks, agrees that Oracle’s chances of completing its takeover bid are
slim, but emphasizes that stockholders will have the final say.

“From a shareholder value perspective it could be argued that the
deal
should get done,” Hollands told internetnews.com.

“On the basis
of
PeopleSoft’s business fundamentals, I don’t think PeopleSoft stock is
worth
the current bid amount of $21 [per share]. Maybe $14, $15, $16 tops, but
not
$21. Perhaps PeopleSoft shareholders will see the greatest value to
themselves lying with approving Oracle’s (albeit lowered) $21 per share
bid. Considering PeopleSoft shares are trading in the mid-$17s, I think if
you are a major shareholder and you don’t go for the Oracle deal then from
a purely financial perspective you should have your head examined.”

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