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Oracle rethinking bid for PeopleSoft

November 2003

Oracle rethinking bid for PeopleSoft

Reimbursements could be major liability

Carrie Kirby, Chronicle Staff Writer
Wednesday, November 12, 2003

Oracle Corp. might have to drop its $7.3 billion hostile takeover bid for PeopleSoft Inc. because of the smaller company's latest strategic maneuver, the Redwood City database giant said in an acrimonious court filing. 

In its first acknowledgment that this potential acquisition might slip through its fingers, Oracle complained in two filings with the Delaware Chancery Court that an expanded money-back offer from PeopleSoft would make it impossible for any buyer to responsibly purchase and run the company. 

Oracle asked the court to immediately stop PeopleSoft from signing any more contracts with the guarantee, which promises customers two to five times their money back if an acquirer reduces the amount of software support or fails to meet certain other requirements. 

"If the PeopleSoft Board is permitted to continue to issue self-serving entrenchment motivated contracts under the Revised Money Back Offer, Oracle may be forced to abandon its bid, as it will no longer be economically reasonable," Oracle said in its filing on Monday. 

Oracle believes PeopleSoft expanded the money-back offer to ward off the takeover bid, which its management opposes. As such, the filing alleges, PeopleSoft is illegally depriving shareholders of the opportunity to accept Oracle's bid if they want to. 

PeopleSoft, however, says the offer is merely a way to reassure customers who have been reluctant to invest in the company's large software packages because of the threat that an Oracle takeover might reduce future support or development. 

PeopleSoft spokesman Steve Swasey disagreed with Oracle's contention that the expanded plan would prevent any company from buying the Pleasanton firm. 

"An acquirer -- whether Oracle or anybody else -- would not have to pay a penny to customers if they continued the level of support the customers are currently receiving from PeopleSoft," Swasey said. 

Last week, a small group of individual shareholders filed a similar motion with the Delaware court, arguing that PeopleSoft's money-back deal precluded them from considering possibly lucrative bids from Oracle or any other buyer. 

Even without this complication, the future of Oracle's bid is uncertain as the U.S. Department of Justice and the European Commission weigh whether the combination of the two business-software firms would be permissible under antitrust law. Oracle expects to hear more from those authorities this month or next. 

PeopleSoft originally announced a money-back offer this summer, after Oracle started pursuing its hostile takeover. Oracle asked the court at that time to stop the offer, in a suit that also asked the court to invalidate PeopleSoft's "poison pill," a commonly used defense that prevents unwanted takeovers by issuing new shares to dilute the ownership of would-be buyers. 

Oracle didn't make a big fuss about the original money-back offer, because at the time, the company believed that it could buy and run PeopleSoft without issuing the refunds. 

However, PeopleSoft's revised money-back offer, which it disclosed in a regulatory filing Oct. 27, significantly expands the circumstances under which customers could claim the refunds. 

The original guarantee would become effective if Oracle discontinued support for PeopleSoft products, stopped selling the software to new customers, 

or stopped providing software updates within two years. 

The new guarantee, which PeopleSoft began offering during the third quarter, which ended Sept. 30, would go into effect if the buying company reduces the amount it spends on updates, releases updates on a different schedule from PeopleSoft, or reduces the software's ability to integrate with other products. The new offer is good for four years instead of two. 

PeopleSoft executives have said that liabilities under the two customer guarantees now total about $800 million. 

The new terms would scare off any buyer, Oracle charges. For example, the filing says, the offer's condition that the buyer may not reduce spending on updates would preclude the buyer from implementing any cost-saving efficiencies, even if those savings would not harm the customer at all. 

Investment banker Ken Marlin said that PeopleSoft may have successfully shut down Oracle's bid, at least for now. 

"PeopleSoft may have succeeded in making itself too expensive," said Marlin, managing partner of New York investment bank Marlin and Associates. 

Marlin agreed with Oracle's contention that PeopleSoft's managers used the expanded customer-assurance plan as a tactic to prevent the takeover, thereby preserving their own jobs. He called the move distasteful and "a scorched-earth policy," and said it is not in the best interests of shareholders in the long term. 

However, Marlin acknowledged, PeopleSoft management would not have dared pull off the move had more investors pushed to be allowed to consider Oracle's bid. 

"Shareholders look at the stock price, and the stock price has held up," Marlin said. 

PeopleSoft's Swasey countered that because PeopleSoft's management has exceeded expectations in the past two financial quarters, preserving the status quo is in fact in shareholders' best interest. 

Shares of PeopleSoft fell 2 percent on the news, closing at $21.62. Oracle shares closed at $12.54, down less than 1 percent. 

E-mail Carrie Kirby at ckirby@sfchronicle.com

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