Apparently, Oracle has decided that the best way to compete in the enterprise applications space against the likes of SAP is to swallow PeopleSoft, acquiring its customers and scuttling the rest of the company. Or perhaps, Oracle just wants to disrupt PeopleSoft on the heels of its consolidation play to acquire J.D Edwards, which would put the squeeze on Oracle's applications business. As usual, the customer base has the least to gain from the proposed transaction.
PeopleSoft CEO Craig Conway-who spent eight years as an Oracle executive, mostly in the 1980's-- is convinced that Oracle CEO Larry Ellison is out to derail his company's acquisition of J.D. Edwards. He called Oracle's bid "atrociously bad behavior from a company with a history of atrociously bad behavior."
Ellison simply described the proposed acquisition as a way to create "an even more profitable and competitive company."
However, given all the product overlaps between Oracle and PeopleSoft, integration challenges, and depletion of Oracle cash reserves, the acquisition appears to be far more defensive than offensive. Ellison must have woken up one night last week in the middle of the night feeling choked by rivals SAP, the PeopleSoft-J.D. Edwards combination, and the specter of Microsoft investing billions in the enterprise market, and decided to make his own preemptive attack.
I asked Marc Benioff, CEO of salesforce.com--a competitor to both Oracle and PeopleSoft--and a 13-year veteran of Oracle and former Ellison protégé, about the proposed acquisition. "It's either a Larry Ellison-style Sun Tzu jujitsu move to defocus Craig Conway's acquisition of J.D. Edwards or the emergence of Oracle as the Computer Associates of client/server computing," Benioff noted. "That said, the mega acquisition of a duplicate code base, and its associating principles is everything Larry Ellison has preached against over and over."
Ellison's new, handpicked strategic advisor, Chuck Phillips, the former Morgan Stanley enterprise software analyst who joined the company last month, may have helped tip the scales in favor of a hostile takeover. He knows both companies well from his analyst days, and like Ellison believes that the industry is ripe for consolidation. From his new Oracle perch last week, Phillips said that the $16 per share offer was fair and that PeopleSoft is not as strong as it once was. Ellison was more blunt in describing PeopleSoft as a company in distress.
At this point, Oracle's bid for PeopleSoft is a shotgun wedding, with the bride stiff-arming the groom and questioning his motives. Ellison is not showing much appreciation for the bride, offering only a 6 percent premium over PeopleSoft's closing price Thursday of $15.11. However, it's just the opening salvo. The PeopleSoft board will be expecting a bigger dowry this week, if Oracle is really serious. At the end of this merry-go-round, Oracle's move on PeopleSoft could be rebuffed by shareholders, but not before PeopleSoft has gone through a potentially destabilizing gauntlet.
At this early stage, it's difficult to tell whether the union has legs, but it's shaping up to be as rancorous as the HP/Compaq affair. Oracle definitely has the advantage. The company could claim that vanquishing a competitor and gaining customers in its battle against SAP and a host of smaller competitors, as well as dispersing billions of dollars to PeopleSoft shareholders, is good for the both camps. Even if Ellison's offer is just a feint attack, it could fatten Oracle's coffers by spreading fear, uncertainty and doubt among PeopleSoft and J.D. Edwards customers.
The product overlap and plan to eliminate the PeopleSoft applications over time is a bad situation for PeopleSoft customers. For now, it freezes most customers who are planning to upgrade to PeopleSoft 8 or acquire any of PeopleSoft's broad product portfolio.
IT organizations are concerned about how Oracle would support their investments in PeopleSoft products, given its stated goal to consolidate around the Oracle platform. Oracle promises to provide "enhanced" support for customers on existing PeopleSoft platforms. Ellison claimed that PeopleSoft customers would benefit because Oracle would extend support for current products and let users upgrade on their own time schedule. "We won't charge additional licensing to go from PeopleSoft 7 to PeopleSoft 8, or if they choose to upgrade to Oracle eBusiness Suite," Ellison said.
But you have to wonder what enhanced support means and how long it stays in place, especially if the economy continues to be rough on technology firms. The questions that PeopleSoft customers will be asking include:
- Can I put my trust in Oracle to do what is in my best interest or its own?
- What is my pain threshold for migrating to yet another platform?
- Will the applications provide equal support for non-Oracle databases?
A spot check doesn't represent the entire user base, but enterprise software isn't yet a commodity product, in which the offerings from one vendor to another have little differentiation except pricing. I doubt any IT shops are taking seriously Ellison's claim during the announcement last week that by bringing together the top developers from Oracle and PeopleSoft they can make a "very simple upgrade." Java, .Net, and Web services are helping to create more standard software architectures, but swapping one ERP vendor for another is not as simple as swapping out one PC for another.
Markus Berner, a SAP spokesperson, predictably viewed the potential acquisition as largely immaterial to its business: "SAP will still be the undisputed leader with 54 percent market share. But we would then have a clear No 2 competitor. This would give us the opportunity to be even more focused. In terms of market share, SAP is still double the size of Oracle applications and PeopleSoft combined." However, SAP is not as dominant in North America as in other geographies, and would be squeezed if its two primary rivals could manage to achieve a synergistic union.
Whatever the outcome, the tectonic plates in the enterprise software industry are shifting. The Oracle-PeopleSoft saga is just the first of many mergers and acquisitions to come as the technology industry begins to creep out of the doldrums. How long will billion dollar companies like BEA, Sun, Siebel, and smaller best-of-breed companies last as independent entities? When will Microsoft apply some of its billions in cash to speed its way into the enterprise software market? Will IBM break with tradition and jump into the enterprise applications market? Is Computer Associates ready to start acquiring companies again? The answers to these questions will become clearer in the months to come.
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