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Oracle bid may be tip of merger wave

June 2003

Wednesday, June 11, 2003, 12:00 A.M.

Oracle bid may be tip of merger wave

By Joseph Menn and Alex Pham 
Los Angeles Times

Oracle Chief Executive Larry Ellison and the head of his hostile takeover target, PeopleSoft Chief Executive Craig Conway, are engaged in name-calling and tactical maneuvering, but their actions show they agree on one thing: The software industry is finally entering a long-expected era of consolidation.

As promised, Ellison's database software firm Monday filed its formal $5.1 billion tender offer for shares of PeopleSoft. That move was prompted by PeopleSoft's agreement last week to buy rival business-software maker J.D. Edwards & Co. for $1.5 billion in stock.

Few analysts expect Oracle's offer, which amounts to $16 a share, to win support of holders of more than 50 percent of the shares by the initial July 7 deadline — especially since PeopleSoft shares closed yesterday at $17.90. Because Oracle's bid was initially just 6 percent over PeopleSoft's stock price, some analysts suggest Ellison wouldn't particularly mind rejection.

But experts generally praised Ellison's surprise move as a shrewd one that would benefit Oracle win or lose — and one that would launch a wave of deal-making in the software world.

"This is the first week of what will be a decade of consolidation in the applications space," said Banc of America Securities analyst Robert Austrian. "The large suite vendors are going to get larger and stronger, and everyone else is going to get weaker. If stand-alone firms are attractive, they'll be swallowed."

If the bid is accepted, Oracle will surpass Microsoft in the market for business-application software. If it is rejected, Oracle might still sow doubt among PeopleSoft's customers, since Ellison pledged to stop selling PeopleSoft's programs for human-resources-management.

Hostile takeovers are rare in the software industry, since the target firm's key asset is usually talent that can simply walk away. But the dearth of jobs available after a two-year slump in software sales may allow Ellison to retain whichever PeopleSoft employees he wants, analysts said.

"You could walk out all you want, but where are you going to walk to?" said Bruce Richardson, an analyst at Boston-based AMR Research.

Some investment bankers say they have been expecting a surge in friendly mergers for years. The collapse of the market for initial public offerings made money much harder to come by, and many predicted struggling companies would be swallowed up by stronger rivals.

Instead, after the tech sector crashed in 2000, even strong companies focused just on surviving, not on swallowing their straggling brethren. And those in good shape became reluctant to sell, believing they couldn't fetch a fair price during a downturn, said Ken Marlin of Marlin & Associates, a New York technology and media investment bank.

All that began to change over the last six months, as the technology-heavy Nasdaq index climbed 20 percent. "People are beginning to think that the worst is behind us," Marlin said.

Several factors are at work. Because potential acquirers are seeing slower internal growth, they are looking elsewhere to boost revenue. Share prices that are low, but may soon be headed up, are tempting targets.

Another impetus comes from the big companies that buy the most software, Austrian said. Many are having trouble integrating programs from different vendors. If sellers combine, that task would disappear.

So if Ellison's intervention spoils PeopleSoft's plan to buy J.D. Edwards, Oracle might snap it up itself. If Oracle doesn't get PeopleSoft, business-applications leader SAP might make a play.

Material from Bloomberg News is included in this report.

Microsoft not interested in PeopleSoft, executive says

SEATTLE — Microsoft isn't interested in derailing Oracle's $5.1 billion hostile bid for rival PeopleSoft with a competing offer, a Microsoft executive said.

"Absolutely, we would not be pursuing PeopleSoft at this time," said Lynne Stockstad, general manager of Microsoft's business-solutions group.

Microsoft also doesn't plan to take on Oracle and PeopleSoft with programs that run accounting, customer-management and human resources for large companies. Microsoft will sell those applications only to companies with less than $800 million in annual sales, Stockstad said.

Microsoft has spent $2.55 billion in the past 2-1/2 years to bolster its small-business offerings with two acquisitions, and plans to invest $2 billion this fiscal year.

— Bloomberg News

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