Oracle gets go-ahead to acquire PeopleSoft

10 Sep 2004

A US federal judge yesterday gave enterprise software giant Oracle the go-ahead to take over smaller rival PeopleSoft. Analysts believe that the takeover could trigger further mergers and consolidation in the global business software market.

US District Judge Vaughn Walker in a San Francisco courtroom rejected the US Government’s bid to block the deal, saying the Department of Justice lawyers had failed to prove their case that the takeover would threaten the business software industry by eliminating one of only three players in the segment where PeopleSoft and Oracle compete.

In his 164-page ruling, Walker sided with Oracle on most counts: “Plaintiffs have not proved that a post-merger Oracle would have sufficient market share in the product and geographic markets” to be anti-competitive. “Plaintiffs have not proved that the product market they allege, high-function (business software), exists as a separate and distinct line of commerce,” he added.

The judge also said the Justice Department did not prove that the business software of “numerous other vendors,” including Lawson Software, American Mangement Systems and Microsoft, does not compete with the similar products of Oracle, PeopleSoft and SAP.

In summing up his strongly worded opinion, Walker concluded: “Because plaintiffs have not shown by a preponderance of the evidence that the merger of Oracle and PeopleSoft is likely substantially to lessen competition in a relevant product and geographic market in violation of (antitrust laws), the court directs the entry of judgement against, plaintiffs and in favour of defendant Oracle.”

The head of the US Justice Department’s Antitrust Division, R Hewitt Pate, said that the department was “disappointed” by the ruling and was considering whether to appeal.

However, the proposed takeover of PeopleSoft is far from being a done deal as PeopleSoft shareholders must approve the plan. In addition, EU antitrust regulators are expected to rule on the matter over the next several weeks. Meanwhile the board of PeopleSoft said it would review the ruling. It has already rejected Oracle’s bid several times because it believes Oracle’s most recent bid of US$7.7bn does not reflect the company’s true value.

Commenting on the outcome of the case Phil Carnelley, research director at the respected analyst firm Ovum said that the judgement could affect the wider IT sector. “This doesn’t just affect Oracle. If it goes through it will underline the view — which we have long promoted as has Oracle CEO Larry Ellison — that the industry is maturing fast and the only long-term survivors will be the really big players. Consolidation will surely accelerate in the software markets.”

Carnelley drew attention to the most surprising aspect of the case; the firmness of the judge’s ruling. Walker emphatically rejected the Justice Department’s case that competition would be reduced and had harsh words for the software customers they had used to support their arguments: “Unsubstantiated customer apprehensions do not substitute for hard evidence.” Ovum pointed out that the judge was not persuaded that Microsoft would stay away from this market.

“It’s a remarkable victory for Oracle,” Carnelley said, “But the war isn’t over by any means.” Charles Phillips, Oracle president and ex-investment banker who is running the Oracle bid, said earlier this week he would expect the Justice Department to appeal although at the time he was unaware what the judgement would be.

Although the EU has yet to rule on the case, Carnelley suggested that the arguments against the takeover are weaker in Europe. “SAP has a much more dominant position here and PeopleSoft is much weaker than in the US.”

Another potential stumbling block to the deal is PeopleSoft’s ‘poison pill’, which its directors must remove. They have been openly hostile to Oracle thus far. PeopleSoft has issued a written statement that it will consider the Justice Department’s ruling. Phillips suggested to Ovum analysts earlier this week that “there is a scenario where we can have this wrapped up by Christmas”.

By John Kennedy and Gordon Smith