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U.S. sues to block Oracle offer

February 2004

U.S. sues to block Oracle offer

BUT COMPANY TO PERSIST IN BID FOR PEOPLESOFT

By Sam Diaz

Mercury News 
Fri, Feb 27, 2004

Oracle pledged late Thursday to "vigorously challenge" a Justice Department antitrust lawsuit to block its $9.4 billion hostile bid for PeopleSoft, setting the stage for a lengthy legal battle in which Oracle is seen as the underdog.

Oracle's vow could greatly delay a resolution to the acrimonious nine-month takeover battle between the two business software makers.

In a stinging setback to Oracle, the Justice Department in a civil suit jointly filed with seven states alleged that the merger of Oracle and PeopleSoft would reduce competition in the business software market, "resulting in higher prices, less innovation and fewer choices" for customers. The suit was filed in U.S. district court in San Francisco on Thursday.

"We believe this transaction is anti-competitive -- pure and simple," R. Hewitt Pate, assistant attorney general in charge of antitrust, said in a statement.

Oracle responded quickly, saying that the department's claim that there are only three sellers of sophisticated business applications to large corporations does not fit the reality of a highly competitive market.

"We believe that the government's case is without basis in fact or in law, and we look forward to proving this in court," Oracle spokesman Jim Finn said in a statement.

With the takeover fight likely to be tied up in court for months, Oracle also said it will withdraw its slate of directors up for election at PeopleSoft's annual meeting March 25. Oracle had been seeking to gain control of PeopleSoft's board in order to increase its chances of getting PeopleSoft to negotiate a deal or to drop its "poison pill" anti-takeover measures.

Oracle, based in Redwood Shores, also vowed to continue the pursuit of PeopleSoft, extending its $26-a-share offer to shareholders of Pleasanton-based PeopleSoft, from March 12 to June 25.

Oracle's vow to fight on is unusual because companies tend to withdraw their bids when faced with opposition from antitrust regulators.

Oracle officials have said the Justice Department is pursuing a novel antitrust theory in the case. But Pate went out of his way to say it was simply a matter of harming customers through diminished choices.

Three companies -- PeopleSoft, Oracle and SAP of Germany -- dominate the market for software that handles internal operations, such as personnel and financial management, at large companies and organizations.

"This lawsuit seeks to ensure that there will continue to be vigorous competition in this important industry," said Pate.

In the court filing, the Justice Department included a 2002 quote by Oracle co-president Charles Phillips -- who then worked as an industry analyst for Morgan Stanley -- saying that the "back-office applications market for global companies is dominated by an oligopoly comprised of SAP, PeopleSoft and Oracle."

In filing its suit, the Justice Department adopted a recommendation from its staff earlier this month against Oracle's bid.

The decision was made after a months-long investigation by the Justice Department, including interviews with the two companies' executives and customers.

Many customers expressed concerns that Oracle's takeover of PeopleSoft would mean they would have to jettison their PeopleSoft systems and undertake another costly upgrade.

"We don't have any money to throw around, which is why this is a serious issue for us," said Tom Whittington, chief information officer with Contra Costa County. "We just went through a selection process and picked PeopleSoft. We thought they were the best vendor and we want to see that product developed and enhanced."

PeopleSoft Chief Executive Craig Conway, in calling on Oracle to abandon its takeover effort, said he will continue meeting with large shareholders to assure them that his company remains focused on customer support and technological innovation.

In an interview, Conway said Oracle's continued pursuit reaffirms what PeopleSoft has been saying since the hostile bid was launched in early June. "The intent is on damaging our business," said Conway, who at one point during the battle likened Oracle Chief Executive Larry Ellison to Genghis Khan.

Some observers said Oracle has a tough legal challenge ahead. "There appears to be nothing controversial about the legal underpinnings of the government's case. It is a pretty straightforward application of antitrust laws to an important sector of the software industry," said Jeff Blattner, a partner at law firm Hogan & Hartson.

Likewise, Oracle could come under fire from its own shareholders, said Ken Marlin, managing partner of media and high-tech investment bank Marlin & Associates in New York.

"Certainly with this ruling, there will be a lot of pressure on Oracle from its shareholders to pack up and go home," he said.

Not only will Oracle have to fight the federal government and the seven states -- Hawaii, Maryland, Massachusetts, Minnesota, New York, North Dakota and Texas -- but it also may have to take on the European Union, which is expected to follow the Justice Department's position on the bid, Marlin said.

The continued fight by Oracle will be expensive and lengthy, Marlin said. "Oracle already probably has had some shareholders say the price is getting expensive," he said.

Oracle has raised its offer twice since it launched the hostile bid of $16 a share. The bid later jumped to $19.50 a share and now stands at $26 a share.

Shares of Oracle closed at $13.28 Thursday, up 9 cents. PeopleSoft stock dropped 35 cents to $21.78.

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