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Software giant heads to court

June 2004

Software giant heads to court

Suit by Department of Justice claims deal for software company would harm competition

Monday, June 07, 2004

It's been a year and a day since Redwood City-based Oracle Corp. shocked the technology world by launching a hostile bid to take over Pleasanton-based PeopleSoft Inc.

Today, the long-running battle between the two Bay Area software companies will enter a new -- and potentially decisive -- phase.

Oracle is to square off in U.S. District Court in San Francisco with the Department of Justice, which says that a combination of the two companies would hurt competition in the market for human resources and financial software used by big organizations.

Oracle's latest offer for PeopleSoft is $7.7 billion, or $21 per share. PeopleSoft'sstock price has been below $20 since mid-March. On Friday, PeopleSoft's shares closed at $17.31, down 8 cents, on the Nasdaq Stock Market.

If Oracle is victorious, the company likely would be in a stronger position with European regulators, who have opposed the deal, said New York investment banker Ken Marlin.

 An Oracle victory would leave the PeopleSoft board "with really a single issue and that's price," Marlin said.

The trial, expected to last about a month, may come down to the issue of how the market for financial and human resource software should be defined.

The Justice Department says three companies -- Oracle, PeopleSoft and Germany's SAP -- dominate the market for business software sold to large organizations with complex needs.

The loss of PeopleSoft as a competitor would allow Oracle to raise prices, the government says.

"Customers often consider Oracle and PeopleSoft the top two competitors in head-to-head bidding competition," government antitrust lawyers wrote in a brief filed last week. Customers benefit when Oracle and PeopleSoft maneuver to out-bid one another, the government says.

While Oracle may claim that more vendors exist besides PeopleSoft, Oracle, and SAP, the true reality lies in what customers think, said PeopleSoft spokesman Steve Swasey.

"What you are going to hear in the trial is customers who say there are only three primary vendors and going to two would be anti-competitive," he said.

Oracle's lawyers say this conception of the software market is deeply flawed and outdated. They say there are many different competitors such as Lawson Software, Microsoft and AMS. They also argue that firms such as ADP and Fidelity allow companies to outsource their human resource functions, replacing software that runs on internal computer systems.

"Blocking this deal would do real harm to the efficient evolution of this industry," Oracle's lawyers argue in a brief filed last week. "The government has simply missed the important competitive forces in this industry ... obsessing over one tree in a richly dynamic forest."

Hillard Sterling, an antitrust lawyer with Much Shelist PC in Chicago, agreed with Oracle's argument.

"The government doesn't seem to have the solid, specific evidence to support its market theory," Sterling said. "It has lots of witnesses who will offer anecdotes of their difficulties substituting software, but anecdotes do not an antitrust case make."

However, Judge Walker's opinions of how antitrust law applies to fast-changing software markets will be extremely important, Sterling said. Because software markets are so new, he said, there isn't any relevant case law out there to guide him.

Some information technolgoy officials agree with the government's argument that it is difficult for new competitors to emerge.

Dave Macdonald, director of information technology for Alameda County, said that said it would be risky to commit to a long-term software deal with a new company whose future is uncertain. Like many California counties, Alameda County runs PeopleSoft software.

"Would you want to be running a payroll system that was pretty good, but not quite accurate?" Macdonald said. Besides Oracle, PeopleSoft and SAP, he said, "there's no company on the horizon that's gaining market share."

One of those potential new competitors is the world's largest software company, Microsoft.

The government wants to show that Microsoft has no plans to compete against PeopleSoft and Oracle. But Oracle lawyers argue that the government is stretching the truth by portraying Microsoft as company that would be unable to gain market share, "despite its unsurpassed resources and noted aggressive streak."

Both Oracle and the government plan to call different Microsoft employees to support their cases.

Oracle's witness list includes Larry Ellison, Oracle's combative chief executive officer, and former congressman Tom Campbell, dean of the Haas School of Business at UC Berkeley.

Oracle's lawyers also plan to call Craig Conway, PeopleSoft's chief executive officer, and grill him for up to six hours.

The government plans to call 23 witnesses and one rebuttal witness, most of whom will talk about the arcane technical details of selecting a software vendor.

The government also plans to call Richard Allen, former chief financial officer of Denver-based software maker J.D. Edwards & Co., which PeopleSoft acquired last year. He will testify about his former company's failed attempt to develop software that would have competed with PeopleSoft and Oracle.

Staff Writer David Morrill contributed to this report. Alan Zibel may be reached at (510) 208-6414 or .

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