Waiting for the Dust to Settle

Oracle files paperwork in PeopleSoft bid; J.D. Edwards defends merger with PSFT; analyst points to driver for ERP merger-mania

Mesa, AZ — June 9, 2003 — The dust remained unsettled in the enterprise resource planning (ERP) space today, as Oracle Corporation filed the initial paperwork to make good on its hostile takeover bid for rival PeopleSoft, and executives of J.D. Edwards put forward a defense of the company's planned merger with PeopleSoft, a deal put in doubt by Oracle's offer.

As iSource Business reported on Friday, Oracle gave the ERP world its final jolt of the week by announcing a $5.1 billion bid for PeopleSoft, just days after PeopleSoft said it would buy J.D. Edwards in a $1.7 billion stock swap. The PeopleSoft-J.D. Edwards deal would have moved PeopleSoft ahead of Oracle into the number two slot among enterprise application providers, behind German giant SAP.

Oracle filed paperwork with the U.S. Securities and Exchanges commission today formalizing its bid for PeopleSoft.

Last Friday, after Oracle CEO Larry Ellison made the $16 per share offer for PeopleSoft, a premium of about 6 percent over PeopleSoft's trading price before the bid was announced, Craig Conway, PeopleSoft's president and CEO, minced no words in responding to the unexpected and, apparently, unwanted offer, which Conway labeled "atrociously bad behavior from a company with a history of atrociously bad behavior."

Conway added, "Obviously it is a transparent attempt to disrupt the acquisition of J.D. Edwards by PeopleSoft."

PeopleSoft's CEO may be at least partially right, according to Jon Derome, program manager for business applications and commerce at technology research firm Yankee Group. "It seems that Oracle was trying to throw cold water on PeopleSoft's strategy to acquire J.D. Edwards and PeopleSoft's plan to move into manufacturing and to try to sell into mid-market companies," Derome said in an interview on Friday.

Notably, Oracle said that once its acquisition of PeopleSoft is complete, it would review whether, and on what terms, it would support the J.D. Edwards acquisition, but it made no firm commitment to the deal.

Clearly J.D. Edwards still believes that its acquisition by PeopleSoft is a better option than an Oracle-PeopleSoft combination. In a press conference Monday morning from J.D. Edwards' users conference in Denver this week, the company's CEO, Bob Dutkowsky, offered a spirited defense of his company's deal with PeopleSoft, saying that it would be good for the two companies, since they offer complementary, rather than competing, product lines, and good for the two companies' customers, since the merged organization would continue to support both platforms.

Dutkowsky rejected the notion, put forward by Ellison, that the PeopleSoft-J.D. Edwards marriage was one of necessity between two struggling players. "At no point in time was there a 'for sale' sign on J.D. Edwards," Dutkowsky said, asserting, rather, that J.D. Edwards itself had spent eight months assessing options for improving its position in the market before selecting PeopleSoft as the best partner for a merger. He went on to point out that the company has had six profitable quarters and is sitting on some $400 million in cash.

The CEO also suggested that Oracle's bid could raise antitrust issues in the increasingly shrinking ERP market. Were Ellison's takeover bid to succeed, the aftermath essentially would leave two major players in the large-enterprise application market: Oracle-PeopleSoft and SAP.

Derome agrees that the PeopleSoft-J.D. Edwards deal makes sense. Besides giving PeopleSoft access to the manufacturing companies that were J.D. Edwards traditional customers, the deal would also give PeopleSoft access to J.D. Edwards' sales staff with experience in the mid-market, which PeopleSoft has left largely untapped.

On the downside, Derome said that much of PeopleSoft's perceived value in the marketplace has derived from its so-called "pure Internet architecture," embodied in version 8 of its solution set. But J.D. Edwards has not moved toward a similar architecture. "So the downside for PeopleSoft is, how do they take that J.D. Edwards asset and convert it into a PeopleSoft asset?" Derome said. "How do they move the code base from the J.D. Edwards architecture to their architecture so they can have a single, unified platform that they can sell to either existing customers or new customers." That integration effort would have been significant, Derome said, but manageable.

For PeopleSoft customers, the Oracle offer appears to have nothing but downside since success for Ellison could spell the virtual end of the line for PeopleSoft's solutions. Ellison indicated in announcing the offer that Oracle would not resell PeopleSoft's software and would not invest to develop follow-on versions, clearly looking to transition its rival's customers to the Oracle platform. "At some point in time, you'd be forced to migrate to a new platform, and switching costs for ERP systems are incredibly expensive," Derome noted.

In other words, Oracle would have successfully eliminated a major competitor and gained a raft of new potential customers, and therein lies what Derome believes is the force driving much of the current acquisition activity in the ERP market.

"Folks aren't buying 'Big Bang' implementation projects anymore, so the $1 million, $10 million and $100 million ERP deals that characterized the marketplace in the 1990s are few and far between," the analyst explains. "Users are doing is buying smaller-footprint applications to service their customers or their interactions with their suppliers, and those smaller footprint applications for an ERP vendor look very much like an up-sell opportunity into their install base, as opposed to an opportunity to sell 'Big Bang' implementations to new accounts. If that's the case — if it is an install base up-sell opportunity — the way to succeed is to have the biggest, happiest client-base. So if Oracle buys PeopleSoft's client base, as well as, possibly J.D. Edwards' client base, there are that many more customers that they can sell these customer- and supplier-facing applications, what we're calling 'edge of the enterprise' applications."

What does all this mean for current or potential customers of PeopleSoft and J.D. Edwards? Derome says that the likely reaction of companies that were considering a solution from one of the two providers will be to put that decision on hold until the dust settles, however long that might take.

Meanwhile, PeopleSoft noted in its statement last Friday that it is required by law to review all cash tenders regardless of intent, and that it would provide a definitive recommendation to shareholders shortly thereafter. "In the meantime, PeopleSoft advises it shareholders to take no immediate action," the company concluded.

Stay tuned.
Companies in this article