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PeopleSoft activates its ‘poison pill’

June 2003

PeopleSoft activates its 'poison pill'

By Jessica Guynn and Ellen Lee

Tue, Jun. 17, 2003

In its most aggressive moves yet to repel Oracle Corp.'s $5.1 billion takeover play, Pleasanton-based PeopleSoft Inc. sweetened its deal to buy smaller rival J.D. Edwards & Co. and began offering refunds to some customers if Oracle succeeds in buying PeopleSoft.

PeopleSoft's latest salvos make it more difficult for Oracle to challenge its planned merger with J.D. Edwards and could end up costing Oracle more to buy PeopleSoft.

Oracle, of Redwood City, is preparing to sue PeopleSoft to block the restructured deal on grounds that it is bad for shareholders, said executives close to the company.

The lawsuit, which could be brought as early as this week, is expected as well to take issue with PeopleSoft's new campaign to attract and keep customers by offering some of them double their money back if Oracle wins the battle. Oracle contends that the promotion acts as a poison pill to make PeopleSoft more costly to acquire.

"PeopleSoft is pushing back, and it's doing it hard, despite its name," said Bob Djurdjevic, an analyst with Annex Research.

The new offer for J.D. Edwards, which is half cash, half stock, shows PeopleSoft's determination to block Oracle's hostile bid, analysts say. It would cost PeopleSoft nearly half the $2 billion it has in cash, thereby making it a less-attractive target for Oracle. It also will speed the acquisition because under the new terms, PeopleSoft is no longer required to submit the deal to its shareholders for a vote. The deal could close as early as next month.

Accelerating the J.D. Edwards deal puts pressure on Oracle Chief Executive Larry Ellison, who may be forced to increase his cash bid for PeopleSoft to avoid having to buy both companies, a move that could trigger antitrust concerns.

It also could give Ellison an opening to drop his hostile bid. One of the conditions of the bid was that PeopleSoft not change the terms of its agreement to buy J.D. Edwards, said Patrick Walravens, an analyst with JMP Securities.

"The ball is back in Oracle's court," said Daniel Ives, an analyst at Friedman, Billings, Ramsey Co. Inc. "It's going to make it harder for Oracle to convince (PeopleSoft) shareholders to tender their shares. ... Oracle's argument (against PeopleSoft's merger with J.D. Edwards) doesn't hold as much weight now that (PeopleSoft) has restructured the deal."

The new deal would be valued at $1.75 billion, including $863 million in cash and 52.6 million PeopleSoft shares. J.D. Edwards stockholders would have the right to get either cash or PeopleSoft stock. Previously, PeopleSoft planned to buy J.D. Edwards in a stock swap valued at $1.7 billion.

"By offering a cash component, they shore up their deal with J.D. Edwards," said Ken Marlin, managing partner of investment bank Marlin & Associates. "It makes it less likely that J.D. Edwards shareholders will look for a way out of the deal and keeps a strong ally in the fight against Oracle."

PeopleSoft spokesman Steve Swasey said speeding the deal to buy J.D. Edwards would reassure PeopleSoft customers and is a "prudent response to Oracle's attempt to disrupt our business."

Oracle fired back in a written statement, charging that PeopleSoft amended its agreement to buy J.D. Edwards as a "ploy to preserve management's self interest" and take the matter out of the hands of shareholders. "If PeopleSoft's board is so convinced that the J.D. Edwards acquisition is a great deal, why won't they let their shareholders vote on it?" Ellison said.

PeopleSoft's unusual guarantee to refund customers if Oracle buys PeopleSoft and dumps its products potentially could make a hostile takeover more costly for Oracle. Uncertainty over PeopleSoft's future already has hobbled some deals with new and prospective customers, analysts said.

"We believe our customer program is in the best interests of our customers and stockholders," said PeopleSoft spokesman Steve Swasey, who would not give specifics on the promotion. "We've initiated this program to protect our customers' investments and our market position."

A PeopleSoft executive said the deals are on a "case-by-case basis" and are not "one size fits all."

Richard Williams, an analyst with Summit Analytic Partners, said a large number of customers would have to take advantage of the offer to "materially impact the viability of the deal."

PeopleSoft is using a novel antitakeover defense that acts like a poison pill, which when triggered makes takeover attempts prohibitively expensive for hostile bidders.

"This is a poison pill in a very different guise," said Jonathan Jacobson, an antitrust lawyer with Akin, Gump, Strauss, Hauer & Feld in New York. "It could be a strong deterrent by putting Oracle on the hook to spend a lot more money."

Oracle will argue the customer refunds hurt shareholders, while PeopleSoft will argue its survival depends on attracting and keeping customers, Jacobson said.

It is unclear if this attempt to foil Oracle's hostile bid could be successfully challenged in court. Antitrust experts such as Hastings law professor James McCall said it does not pose anticompetitive concerns. The courts have tended to give boards of directors "leeway" in using poison pills and other scorched earth tactics, said Boalt Hall law professor Stephen Choi.

"It's an aggressive and unproven play," said Silicon Valley lawyer Christopher Kaufman, a partner with Latham & Watkins.

It may work with customers. Bobby Ho, senior human resources information systems analyst for Tustin-based Ricoh Electronics Inc. in Southern California, which has used PeopleSoft's human resources software for about six years and is considering buying more software from the company, said he would be swayed by a double rebate.

"If I were to purchase today, I would take that deal in a heartbeat," Ho said. "It's a no-lose situation."

The verbal jousting in the increasingly hostile faceoff between the two software competitors continued to heat up this week as PeopleSoft Chief Executive Craig Conway and two top Oracle executives, Jeff Henley and Chuck Phillips, pitched East Coast institutional investors, with Oracle taking tough questions, Walravens said.

On Monday, PeopleSoft and Oracle each launched a major publicity campaign to win over investors and customers, with both companies placing full-page advertisements in major newspapers.

The New York Times contributed to this report.

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