May I buy your beloved pet dog, just so I can take him around back and shoot him? That's how the chief executive of PeopleSoft, Craig Conway, described the Oracle Corp's hostile bid for his company, which Oracle intends to use to move PeopleSoft customers to its own software.
Oracle's takeover tale has entered its 16th month, making it a drama of many acts. Conway currently declares that he holds no personal animus against Lawrence Ellison, Oracle's chairman. But in the past, the two rivals made remarks about each other that were not customary politesse.
A "sociopath" is the piquant way Conway described Ellison last year. Returning the favor, Ellison appropriated the image of Conway's vulnerable pet: If Conway and the dog were standing next to each other, he said, and "I had one bullet, trust me, it wouldn't be for the dog."
PeopleSoft's dogged resistance to Oracle's offers attracts our interest. The most recent tender offer was for US$21 a share, giving PeopleSoft a valuation of about US$7.7 billion.
As long as PeopleSoft's board carries on the fight, the prospect of a forced sale also gives the deal a morbid fascination. Historically, unfriendly takeovers in which the target is a sizable software company have a nearly perfect record of failing after they are finished.
The deal can also be seen as a harbinger of many more in a mature industry. Ellison was among the first to say that software companies could never return to the giddy days of yore. Growth rates will remain in the single digits. Price-to-earnings ratios will no longer reflect a fat premium. Excess capacity must be trimmed. Many companies will disappear.
Naturally, Ellison uses the general trends to give Oracle's unwelcome bid for PeopleSoft a protective cloak of Darwinian necessity. His ambitions were bolstered two weeks ago, when the Justice Department lost its suit to block the merger on antitrust grounds.
On paper, this was a major victory for Oracle. But left unchanged is the company's underlying predicament: How will it retain People-Soft's customers, most of whom considered and rejected Oracle's notoriously inferior wares before picking those of its competitor?
PeopleSoft, Oracle and the market leader, SAP, offer software suites of related programs for large corporations' most basic needs, like handling finance, human resources, customer relationships and manufacturing. This category of software falls under the less-than-helpful label of enterprise resource planning -- it's often abbreviated to the eye-glazing acronym ERP, but I prefer "enterprise software."
It is the most complex -- and expensive -- software that a corporation acquires. Consultants have to be hired even before the purchase to help the information technology department assess the various offerings. Years of planning are required before the switch is flipped for the first time. Entire divisions of still more consultants are needed to make it work. In sum, putting enterprise software in place is painful in the extreme.
Eric Upin, an analyst at Wells Fargo Securities, says, "This is open-heart surgery with very little anesthetic."
When Ellison started the bid for PeopleSoft, he argued that SAP's dominance in the enterprise segment made it reasonable for the runners-up to combine forces and "really give SAP a run for their money."
This rallying cry would be rousing if Oracle were to adopt PeopleSoft's software, which the marketplace has deemed the best among SAP's challengers. But Ellison insists on making Oracle's struggling offerings the standard.
This month, the company said its software sales in this category were down 36 percent from a year earlier. Bruce Richardson, a senior vice president at AMR Research, explains why Ellison cannot jettison his own software: "How would he admit he has 5,000 application developers building products people didn't want?"
If Oracle wins its fight for PeopleSoft, the acquired customer list will include many clients who are just as resistant to Oracle's embrace as PeopleSoft has been.
Oracle's enterprise software requires -- surprise, surprise -- Oracle database software to function. PeopleSoft, not being in the database business itself, is ecumenical; its software works with the packages of Oracle, IBM and other database vendors. An Oracle-only regime would force about 40 percent of PeopleSoft's current customers to swap their enterprise and database software -- a heart and lung transplant.
Oracle may clear the remaining hurdles - gaining EU approval, prevailing in other lawsuits -- and convert its bid into a successful, friendly one. Upin said that this could occur if Oracle made a richer offer, persuading the PeopleSoft board to accept a price in the mid-US$20s for a stock that would otherwise be in the midteens.
Conceivably, PeopleSoft customers could be enticed to stay. By keeping PeopleSoft a separate entity and reassuring its customers of continuing support without a threat of forced migration, Oracle could tap a new high-margin stream of revenue from maintenance contracts.
On paper, this would be masterly financial engineering: converting cash in Oracle's treasury into earnings growth. But, as Upin concedes, it would require of Oracle an attention to customer service that has not been its hallmark.
Bill Schaub, vice president at Techtel, an independent research firm in Emeryville, Calif., says his company's most recent survey of IT buyers shows that negative opinions of Oracle have never been greater in 12 years of surveys.
Last week, PeopleSoft customers met in San Francisco for a company pep rally, and PeopleSoft executives put on a brave front. They also had news to lift spirits: a technology pact with IBM. This set off speculation that IBM may be willing to come to PeopleSoft's rescue. It was easy to imagine Con-way's dog safe in a new home, a company with US$89 billion in revenue, that would protect it from the US$10 billion predator.
If IBM acquired PeopleSoft, it would offer a new science lesson for Ellison to absorb: While consolidation in the software industry is inevitable, Oracle is far from the top of the food chain.
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