The Heat Is On Oracle
The Heat Is On Oracle
July 2, 2003
Oracle Corp. is facing new antitrust obstacles and a potentially bigger price tag in its bid to buy enterprise software maker PeopleSoft Inc.
A group of state attorneys general have formed a working group to look at the antitrust issues involved in the proposed transaction, and the U.S. Department of Justice has requested more information from Oracle on the proposed $6.3 billion purchase.
At the same time, PeopleSoft, of Pleasanton, Calif., announced preliminary second quarter earnings on Wednesday that underscored its stance that Oracle's hostile takeover bid undervalues the company.
Oracle's offer to buy PeopleSoft shares expires on Monday, July 7, at which point the Redwood Shores, Calif., company must publicly withdraw or extend the offer. While Oracle officials declined to comment on their plans, industry analysts suggest the only reason the company would consider withdrawing the tender offer is if it became clear that there would be an antitrust case against it, which would be a major impediment.
Fifteen states including Texas, California, Massachusetts, Delaware, Minnesota and Montana have formed of a working group on behalf of their attorneys general, according to sources familiar with the group. This signals that there is enough regulatory concerns on the states' behalf to warrant the allocation of resource to look further into the deal, legal experts said.
"That doesn't mean it will result in a challenge [to Oracle] by the DOJ or that a federal court would agree and block the transaction," said Charles Biggio, a partner at Akin Gump Strauss Hauer & Feld in New York and former deputy attorney general in the antitrust division of the DOJ in the Clinton Administration. "But if you look at history where states are concerned, more often than not you see some action taken, either a restructuring or an effort to block the deal."
Oracle was quick to downplay the new working group.
"This is just part of the states' normal review process for any merger in any industry. It's important not to confuse process with outcome," said Oracle spokeswoman Jennifer Glass, in Redwood Shores, Calif. "We have pledged our full cooperation."
In addition, the DOJ's second request for information from Oracle signals significant antitrust violation concerns, according to Biggio. Mergers and acquisitions experts said that, considering the size and scope of the transaction, the DOJ's request for information is normal.
Ken Marlin, managing partner of the high-tech investment bank Marlin & Associates LLC, in New York, said that other motivations for the DOJ's move include the antitrust lawsuit filed by the State of Connecticut on June 18, as well as concerns raised by PeopleSoft customers.
"The Justice Department has a tendency to look at transactions if there have been issues raised by customers," Marlin said. "The entire essence of the antitrust laws is to protect the customers. And in this case you have PeopleSoft requesting that customers make their views known to the DOJ."
There could be a third DOJ request for information—or fourth, or fifth, for that matter—but experts don't anticipate one, given that the merger of Oracle with PeopleSoft and even J.D. Edwards & Co. wouldn't concentrate market share to an extreme point and that SAP AG, of Walldorf, Germany, will still be the largest company in the market.
"They'll see Microsoft [Corp.], IBM and SAP," Marlin said. "They'll see quite a number of players even after this proposed transaction. … Even if you contemplate all three coming together, [the Oracle/PeopleSoft/J.D. Edwards combination] would be significantly smaller than a certain large German software provider, so we don't anticipate a third request."
If the DOJ raises objections to the merger, its investigation could be dragged on for an unforeseeable length of time. If not—and experts think this likely—it could take less than 30 to 45 days. In the meantime, Oracle will provide information on market size and its own share of it, as well as its understanding of the shares held by J.D. Edwards and PeopleSoft, Marlin said. "They'll undoubtedly assert that the market definition is large and comprises a lot of larger players," he said.
Oracle pledged cooperation with the DOJ. But the company also said that because complying with the request for information will require significant resources it indefinitely postponed a July 16 hearing in its suit against PeopleSoft and J.D. Edwards & Co., which PeopleSoft is planning to acquire. Oracle's suit, filed in mid-June in Delaware, alleges a breach by PeopleSoft board members of their fiduciary responsibility to shareholders. It looks to nullify two things: PeopleSoft's proposed acquisition of J.D. Edwards & Co., and it's so-called poison pill contingency that thwarts hostile takeover bids by raising the stock price of the company.
PeopleSoft hasn't elucidated the exact nature of its mysterious poison pill. Typically, poison pills are provisions that allow companies to issue new shares to all shareholders in the event that a buyer purchases more than a set amount of stock without consent from a board of directors—usually 20 percent, according to Marlin. The hostile purchaser is excluded from this new-share distribution, and his or her or its share is thereby diluted.
Oracle's postponement could give PeopleSoft the leeway it needs to complete the J.D. Edwards transaction. In a statement Oracle said the parties have agreed to meet in court July 25 – one week after PeopleSoft's bid to acquire J. D. Edwards expires.
While Oracle has wooed PeopleSoft investors and has even raised its offer since it was first tendered, PeopleSoft CEO Craig Conway has repeatedly said the price is too low. On Wednesday he got new ammunition announcing preliminary second quarter earnings of between 13 cents and 14 cents a share, which bested the company's earlier guidance by about 17 percent.
"One thing everyone agreed to from the beginning is that PeopleSoft could not possibly make its quarter earnings," Conway said in a conference call. "Gartner [Group Inc.] immediately [after Oracle announced its intent to buy the company] issued an alert for its clients to stop purchasing PeopleSoft. I'm happy to report many did not."
In the preliminary earnings call this morning, PeopleSoft's Conway talked about a money-back guarantee that PeopleSoft offered second-quarter customers that could amount to a poison pill.
"It is not a refund program," said Conway. "The condition for receiving the compensatory award would be a change of control within a specified amount of time, where the controlling company would cease support of PeopleSoft products.
"The multiple varies depending on scale," said Conway. "It could be two times to five times of the original license."
While the money-back program ended June 30, PeopleSoft is considering an extension.
Oracle spokesman Jim Finn was not impressed by PeopleSoft's earnings report.
"PeopleSoft's claims to have beaten analyst expectations are hardly surprising, since by their own admission over half of their new license revenue resulted not from ordinary course sustainable business but from one-time gimmicks such as two to five times money-back guarantees, favors from business partners, and other tactics from a company desperate to put up numbers for a single quarter," Finn said, in a statement. "We believe that five straight quarters of declining results are a better indication of the underlying condition of PeopleSoft's business."
Lisa Vaas contributed to this story.