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PeopleSoft fighting to control its destiny

June 2003

Posted on Wed, Jun. 11, 2003

PeopleSoft fighting to control its destiny

By Chris O'Brien
Mercury News

As PeopleSoft considers how to respond to Oracle's hostile takeover bid that has set off a software-industry merger saga, experts say PeopleSoft's board faces a difficult task in determining which path is ultimately best for its shareholders.

PeopleSoft, the Pleasanton business-software maker, remains in control of its destiny for the moment, as a result of anti-takeover measures it adopted and the $16-a-share bid by Oracle, which remains below PeopleSoft's stock price. (The shares closed unchanged Tuesday at $17.90.)

That gives the board freedom to recommend against the $5.1 billion deal, which is expected. But it could also be a powerful bargaining chip to extract a better offer if PeopleSoft eventually chooses to negotiate with Oracle, the Redwood Shores database giant.

It all amounts to a high-stakes game of brinkmanship that has developed since Oracle announced Friday that it would make a hostile bid for competitor PeopleSoft. Oracle's unsolicited overture -- rare in the tech industry -- was widely seen as a spoiler to the $1.7 billion friendly acquisition PeopleSoft had announced only four days earlier with smaller rival J.D. Edwards.

Now ``there are just too many possible paths for this to go to predict what happens next,'' said Robert Austrian, a software analyst at Banc of America Securities. ``I'm telling my clients that it's not worth obsessing over all the possibilities.''

One strategy it appears PeopleSoft won't pursue for now is taking Oracle to court. On Tuesday, Oracle issued a news release saying PeopleSoft had decided not to seek a temporary restraining order in Alameda County Superior Court. Just a day earlier, Oracle had said PeopleSoft had threatened legal action against it.

``We are hopeful that this apparent change in course indicates that the PeopleSoft board will be willing to meet with us to discuss our offer,'' Oracle Executive Vice President Safra Catz said in the Tuesday news release.

Bid fosters uncertainty

The ultimate fate of PeopleSoft is complicated by the fact that the Oracle bid may already be hurting sales at PeopleSoft as customers delay buying decisions amid the uncertainty over PeopleSoft's future. If PeopleSoft misses earnings targets and its stock price slumps, it could hurt its merger plans with J.D. Edwards and make it more vulnerable to Oracle.

Germany's SAP, the leader in business-software applications, said Tuesday that it plans a marketing campaign to target PeopleSoft customers. Both PeopleSoft and Oracle have been trying to bulk up to take on SAP.

Several analysts have already lowered their earnings estimates for PeopleSoft this quarter after Oracle's surprise bid. And J.D. Edwards' business faces similar pressure.

On Tuesday, as J.D. Edwards tried to showcase new products at a users' conference, executives faced questions about the merger saga. ``I think the next few weeks, days and months are going to take a lot of different twists and turns,'' said Bob Dutkowsky, chairman and chief executive officer of J.D. Edwards. ``For us, and our stakeholders, the PeopleSoft merger is clearly the best option.''

What's best for PeopleSoft is another matter. Although executives have spoken against the offer -- CEO Craig Conway called Oracle's hostile bid ``diabolical'' -- the PeopleSoft board has a responsibility to its shareholders.

``The board has a fiduciary duty to shareholders, not the executives,'' said Ken Marlin, managing partner of Marlin & Associates, a New York investment bank. ``If the board believes they could negotiate a 30 percent premium from where it started, they could be taking a risk if they don't take advantage.''

PeopleSoft shareholders are already pressing the company's board. A San Diego law firm filed a class-action lawsuit in Alameda County Superior Court against PeopleSoft and its board Tuesday. The suit claims PeopleSoft ``knew that Oracle's hostile cash tender was imminent'' and entered into the proposed acquisition of J.D. Edwards a few days earlier ``as a defensive measure to make PeopleSoft less attractive.''

A PeopleSoft spokesman declined to comment on the lawsuit.

The PeopleSoft board has until June 23 to make a recommendation on Oracle's bid to shareholders.

``PeopleSoft is in the driver's seat,'' said Jason Brueschke, a senior analyst at Pacific Growth Equities, which owns no stock and does no banking business with the three companies. ``They have the poison pill.''

Oracle CEO Larry Ellison could raise his company's offer. Although his offer is good until July 7, he could extend it for 10-day periods indefinitely, leaving a cloud over PeopleSoft's business.

Long proxy fight?

Finally, he could wage a proxy fight to try to take over PeopleSoft's board. Such a battle could take two years because PeopleSoft's directors are not all up for re-election in the same year.

Even with Ellison's hard-nosed reputation, observers say it's unlikely he would want such a long battle.

Alternatively, the PeopleSoft board could also decide to negotiate with Ellison for a higher price.

The board could also seek another suitor to buy PeopleSoft at a higher price than Oracle has offered. Among the companies that have been mentioned as so-called white knights: Microsoft, IBM, SAP and Siebel Systems.

Microsoft has no plans to bid for PeopleSoft, a company spokeswoman said Tuesday.

Or PeopleSoft could find another company to form a partnership or deal that increases the market value of PeopleSoft -- thus thwarting Oracle's bid.

No matter what happens, observers are betting the hostile takeover bid and the countermoves yet to come will likely scramble the software industry.

``Investors should expect a wholesale reshuffling of the landscape,'' Austrian said. ``Friends become foes and foes will become friends. I'm sure managements have been up all weekend trying to figure out what to do.''

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