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For Its PeopleSoft Gambit, Oracle Spurned and Sued

June 2003

June 13, 2003

For Its PeopleSoft Gambit, Oracle Spurned and Sued

CEO Ellison's offer is rejected and he is accused of interfering with the acquisition of J.D. Edwards.

By Joseph Menn and Alex Pham, Times Staff Writers


Database software giant Oracle Corp. got a double dose of rejection Thursday. 


First, PeopleSoft Inc.'s board of directors scorned Oracle's $5.1-billion hostile offer. Hours later, J.D. Edwards & Co. sued Oracle, alleging that it is trying to foil Edwards' $1.7-billion acquisition by PeopleSoft.


At a minimum, the countermoves suggest that if Oracle Chief Executive Larry Ellison is to salvage his audacious plan to buy rival PeopleSoft, a maker of business applications software, he will have to raise the offer price well above the current $16 per share. 


"A good-faith gesture would be to raise the bid," said Jamie Friedman, software analyst with Fulcrum Global Partners, a research firm in New York. "If you think there's going to be a recovery in IT [technology] spending, then PeopleSoft is worth more than what Oracle is offering."


For his part, Ellison vowed to take his case directly to the people who ultimately will decide PeopleSoft's fate: its biggest investors.


"The shareholders own the company. They have the right to decide," Ellison said during a conference call after PeopleSoft's board unanimously recommended that shareholders reject the deal. "We don't believe that PeopleSoft's management has done a good job for shareholders."


The rapid escalation in the three-way battle overshadowed Oracle's strong fourth-quarter financial results, which were reported after the market closed Thursday. The Redwood City, Calif., company said its net income in the three months ended May 31 climbed 31% to $858 million, or 16 cents a share, aided by currency fluctuations and smaller investment losses. Revenue in the quarter rose slightly to $2.8 billion. For the 2003 fiscal year, net income jumped 4% to $2.3 billion, or 43 cents a share, on slightly weaker revenue of nearly $9.5 billion. 


Oracle moved up the release of the results from next week, allowing it to talk about its prowess earlier. Federal regulations restrict what a company can say about its performance just before earnings are reported.


As they released the quarterly figures, Oracle executives announced plans for meetings and Web broadcasts with PeopleSoft investors.


In deciding to come out against the Oracle offer, PeopleSoft's board cited probable antitrust issues and Oracle's stated intention to stop selling PeopleSoft's products. 


"The unsolicited and hostile nature of the offer, combined with Oracle's statements, is designed to disrupt the company's strong momentum at significant cost to PeopleSoft's customers," PeopleSoft said in a written statement. 


PeopleSoft CEO Craig Conway also wrote to customers, urging them not to put off buying the firm's products because of the uncertainty over the Pleasanton, Calif., company's future. 


Denver-based J.D. Edwards filed suit against Oracle in both Colorado and California state courts, alleging improper interference with its contracts. In addition to seeking $1.7 billion in damages, J.D. Edwards asked the courts to stop Oracle from proceeding with its tender offer.


"Oracle's purpose in this effort is to prevent the competition it would face if the J.D. Edwards/PeopleSoft contract is consummated, while its chosen method for achieving its objective is an illusory offer to acquire PeopleSoft," the Colorado suit says.


Oracle said the suit was without merit.


"Clearly PeopleSoft and J.D. Edwards prefer to fight in the courts than let shareholders decide," Oracle spokesman Jim Finn said.


J.D. Edwards may have a difficult time prevailing in court, said Neil Rust, a partner in Los Angeles law firm White & Case. 


Oracle wasn't a party to PeopleSoft's agreement to acquire J.D. Edwards, so "it would be hard to see how it would be interfering because it's just making a tender," Rust said. If Oracle were more deeply linked to either PeopleSoft or J.D. Edwards, then its actions could be considered unlawful interference, he said.


Yet the best-known successful lawsuit over a company improperly interfering with another's contract stemmed from a takeover battle. Pennzoil Co. had a deal to acquire much of Getty Oil Co. when Getty sold out for more to Texaco Inc. Pennzoil sued Texaco in 1984 for interfering and won a judgment for more than $10 billion.


In a hint of what Oracle plans to tell PeopleSoft shareholders, the company's executives took pains Thursday to contrast Oracle's financial successes with PeopleSoft's struggles.


They observed that PeopleSoft's revenue from new licenses for computer applications had fallen 39% in its latest quarter, whereas Oracle's were flat.


"PeopleSoft has had a continuing trend that seems to be getting worse," said Oracle Chief Financial Officer Jeff Henley. He and Ellison mocked PeopleSoft for trying to merge with Edwards, which they described as a money-losing company. J.D. Edwards lost $393,000 in its most recent quarter, after three quarters of healthy results.


But analysts said Oracle's initial offer is unlikely to succeed. They have floated theories that Oracle's true motive is to damage PeopleSoft by sowing doubt among its customers, a claim J.D. Edwards makes in its suit.


Gartner, a technology consulting firm based in Stamford, Conn., advised its clients this week to hold off on big software purchases until the dust settles.


"Our advice for clients is that if they're about to sign a contract with PeopleSoft or J.D. Edwards, they should hold off for the short term, at least until we understand whether or not this bid has some legs to it," said Betsy Burton, vice president of research for Gartner. 


Deal experts said PeopleSoft's board raised legitimate issues that Oracle must address if it is to advance its bid.


"In a hostile takeover situation, the onus is on the aggressor to keep the ball on the other guy's court," said Ken Marlin, managing partner of high tech investment bank Marlin & Associates. 


"What PeopleSoft did today is throw the ball back into Larry Ellison's court. Now if Larry is serious, then the onus is on him to address the issues raised by PeopleSoft's board," Marlin said.


Meanwhile, PeopleSoft tried to soothe clients who might be rattled by recent events.


"We have 8,000 people in this company whose single-minded purpose is to minimize disruption to our business," Conway said during a conference call. "We continue on."


Oracle shares gained 6 cents to close at $13.33 in regular Nasdaq trading, but rose as high as $13.77 in after-hours sessions after the company's earnings release. PeopleSoft shares fell 25 cents to $17.37.

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