Oracle intensifies battle for PeopleSoft

The price increase Oracle announced Wednesday betters the vendor's chances of acquiring PeopleSoft -- but two significant obstacles still stand in the way of the deal's success, analysts say.

Oracle Wednesday upped its hostile takeover bid for PeopleSoft to US$26 per share. The amended offer is 33 percent higher than Oracle's previous bid of $19.50 per share, and a 19 percent premium over PeopleSoft's Feb. 3 closing price of $21.89. It pushes the value of the deal to $9.4 billion.

The $26-per-share price is a very fair price and has a much better chance of being accepted by investors than Oracle's previous offer, says Ken Carey, a senior research analyst at Susquehanna Financial Group.

"Oracle has taken away one of the impediments to the deal. Now institutional investors have a fair price and are willing to tender their shares," Carey says.

Already eight months in the making, Oracle's battle for PeopleSoft still faces two significant hurdles: a ruling from the U.S. Department of Justice regarding antitrust approval, and a "poison pill" provision in the PeopleSoft shareholder agreement designed to prevent a hostile takeover.

On the regulatory front, there has been lots of speculation but little indication from the Department of Justice as to whether it will try to block the deal.

Analyst firm The Yankee Group says the Justice Department will do one of three things: authorize the acquisition unconditionally; authorize the acquisition but require the divesture of J.D. Edwards Co. (which PeopleSoft acquired last June) to a viable competitor in the ERP or CRM market; or oppose any combination of Oracle and PeopleSoft.

Authorization or conditional authorization from the Justice Department will allow Oracle to advance its efforts to acquire PeopleSoft, while opposition means Oracle can appeal, negotiate or litigate the decision, Yankee Group wrote in a research report.

Oracle says it expects a decision from the Justice Department before March 12.

Meanwhile, to get around the poison pill, Oracle needs mindshare among PeopleSoft's board of directors. To that end, Oracle in late January nominated five candidates for PeopleSoft's board. If its bid increase attracts enough large institutional investors, Oracle expects those shareholders will elect the Oracle-sanctioned nominees to PeopleSoft's board; a vote on the new directors is scheduled during PeopleSoft's annual shareholders meeting on March 25.

Oracle expects a new board will amend the poison pill provision, Carey says. "If investors tender their shares to Oracle, Oracle will likely be able to get its slate of directors on the board, at which point they would be able to overturn the poison pill," he says.

For its part, PeopleSoft has been fighting Oracle's unsolicited acquisition attempts since June. One of its tactics is a customer protection program that promises customers two to five times their original software license fees if the company is acquired and the acquirer discontinues PeopleSoft's products.

If Oracle successfully overcomes the regulatory obstacles and poison pill and convinces the PeopleSoft board to support the acquisition, Oracle will need to address this customer protection program, according to Yankee Group. "If PeopleSoft's management team is a willing participant in the acquisition, the combined party will need to either find a loophole in the program language or get customers to agree to waive some of their rights outlined in the program," Yankee Group wrote.

Addressing customer concerns, Yankee Group says even if Oracle acquires PeopleSoft, Oracle will most likely continue to invest in core PeopleSoft products including human resources management, CRM and public sector applications.

"Oracle has every reason to keep PeopleSoft customers happy after the acquisition," Yankee Group wrote. "The ERP and CRM markets are consolidating, and financial success comes from capturing and maintaining the largest customer base possible to increase the flow of maintenance revenue. Protecting this revenue means Oracle will honor its pledge not to force PeopleSoft customers to migrate to Oracle applications."

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