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Oracle saga might have sequels

November 2004

Oracle saga might have sequels

By Dan Laidman  
Sun, Nov. 21, 2004

In the spring of 2003, Oracle Corp.'s chief executive set out a stark vision of the software industry's future. Larry Ellison told a group of Wall Street Journal reporters and editors that more than 1,000 Silicon Valley companies were headed toward bankruptcy and only a scant few powerhouse firms would survive waves of consolidation. About two months later, Oracle launched its hostile bid for PeopleSoft Inc. of Pleasanton, a leading rival in the business software market. With a majority of PeopleSoft shareholders lining up behind the acquisition this week, Oracle is closer than ever to success.

Now after 17 grueling months spent wondering if PeopleSoft would fall, industry observers are wondering if the saga will have sequels. Those who embrace the Ellison philosophy think so.

"We think there is a race going on now that ultimately will result in at most four or five very large global players in the enterprise software business," said Ken Marlin, managing partner with Marlin & Associates, a New York investment bank focusing on technology.

Others tend to see the Oracle-PeopleSoft situation as an aberration born of Oracle's hubris.

"Will this create a tide of acquisitions after that? I think everyone is really skeptical of this acquisition," said Nazhin Zarghamee, chief marketing officer for Hyperion Solutions Corp., a business intelligence software firm based in Sunnyvale. "Everyone is looking at Oracle very skeptically because they wonder if it's purely in their own interest that they are doing this or for the customer's interest."

Oracle executives declined to comment on any future acquisition plans. However, during the antitrust trial this past summer in which the company defeated the Justice Department's effort to block the PeopleSoft takeover, Oracle revealed that it has considered acquiring several other firms.

The companies most widely assumed to be on Oracle's radar are Silicon Valley-based business software specialists BEA Systems Inc. and Siebel Systems Inc., while analysts also mention Lawson Software Inc., Business Objects SA, Hyperion and a number of firms in the growing open-source niche.

Few analysts expect Oracle to make a play for the Tri-Valley's other well-known enterprise software firm, Sybase Inc., the Dublin company known for its database software.

"I'm not sure if the growth is there," said Gene Walton, an analyst based in New York.

A Sybase spokeswoman pointed to comments Chief Executive Officer John Chen has made insisting the company is not for sale.

Hyperion executive Zarghamee acknowledged that "there's always that chance" that Oracle may pursue the company.

"Every software company is on the lookout," she said. "Everyone's on the lookout to see how they can broaden their portfolio and see how they can broaden their space."

However, Zarghamee, a former Oracle employee, said there is a distinction between acquisitions done as part of a company's growth strategy and those done simply to eliminate a competitor. Oracle's bold bid for PeopleSoft strikes some in the software industry as a particularly brash example of the latter.

Trip Chowdhry, a software analyst for FTN Midwest Research, does not expect Oracle to follow a PeopleSoft merger with more large acquisitions.

"You don't make acquisitions for the sake of acquisitions," he said. "You make acquisitions to fill up a need."

The only compelling need Chowdhry sees for another Oracle takeover would be in the open source field, where companies like MySQL Inc. and JBoss Inc. are making inroads with business software based on non-proprietary code.

If the PeopleSoft deal is finalized, Oracle would certainly be sidelined for some time as it integrates the company and deals with customer transition issues, said Bruce Richardson, an analyst with AMR Research.

"I think you have a huge digestion issue," he said. "It's like a guy sitting down trying to eat all of a rhino."

However, Richardson expects Oracle to emerge eventually to seek out other prey. He agrees with Ellison's view of Silicon Valley, saying the root of the coming consolidation is in the saturation of the boom years.

"There were just way too many companies funded," he said. "For everything you could dream of, there's dozens or hundreds of companies providing way-too-similar software."

Beyond the particulars of the technology boom, the software industry is subject to the same trends that affect all companies, said Robert Chalfin, president of the Chalfin Group Inc. and a lecturer at the University of Pennsylvania's Wharton School.

"The software market continues to evolve, and any industry where there are economies of scale, or perceived economies of scale, is going to be ripe for acquisitions," he said.

Software companies are consolidating as customers seek to pay less for more convenience, said investment banker Marlin. Businesses prefer a single software suite for all of their needs, he said, rather than the hassle of dealing with multiple vendors.

Anticipating the counterargument that competition leads to higher quality, Marlin compared software to car parts.

"Some guy might have a better air conditioner for your car, but if the air conditioner the manufacturer gives you is good enough, you'll take it," he said. "Better doesn't always win the day."

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