Oracle’s PeopleSoft bid could mean trouble for users

If Oracle succeeds in its bid to acquire PeopleSoft Inc., users are in for a rough transition, industry analysts said Friday.

With Oracle’s offer of lowball price for PeopleSoft, it’s not clear how likely the takeover attempt is to succeed. But based on Oracle’s culture and past history, it would face significant challenges in meshing its products and operations with PeopleSoft’s, observers said.

“The cultural differences at Oracle and PeopleSoft are night and day,” said Yankee Group analyst Michael Dominy, in Boston. “I’m skeptical at this point. I would need to see a lot more detailed information from Oracle on how they would do this so they wouldn’t piss off all the customers that are PeopleSoft customers.”

Customers said that more time is needed to sort out the implications of the potential acquisition.

“I can think of all kinds of things that would be positive, and all kinds of things that would be negative. It’s just too early,” said PeopleSoft user George Muller, vice president and chief information officer for Imperial Sugar Co. in Sugar Land, Texas.

One buyer of both PeopleSoft and Oracle products, industrial goods maker Ametek Inc. Chief Information Officer Bill Lawson, had mixed thoughts.

“If I felt strongly that (Oracle was) going to take all that investment money and funnel that back to me in the Oracle products in which I’ve invested, I can see that as having an upside,” said Lawson, whose company is based in Paoli, Pennsylvania.

But if Oracle’s focus were diverted by its attempts to both advance its own products and continue maintaining PeopleSoft’s, Oracle customers could suffer from the vendor’s fragmentation, he said.

Oracle is offering $5.1 billion cash, at $16 per share, to acquire PeopleSoft. Company executives say they would stop selling PeopleSoft’s products to new users, but continue selling them to current users, while encouraging those users to eventually migrate to Oracle applications. Oracle also intends to incorporate some of PeopleSoft’s technology into its own Oracle E-Business Suite.

PeopleSoft Chief Executive Officer Craig Conway blasted Oracle’s offer, calling it “atrociously bad behavior from a company with a history of atrociously bad behavior.”

Without the consent of PeopleSoft’s board, Oracle’s bid is unlikely to succeed, thanks to provisions in PeopleSoft’s bylaws aimed at blocking hostile takeover attempts.

In the past, Oracle has criticized technology mergers, suggesting that combining software products rarely works. Oracle plans to avoid that problem by keeping its code base well separated from PeopleSoft’s, said Chief Financial Officer Jeff Henley.

“We would support the PeopleSoft development for a long period of time,” he said. “We’ll work to incorporate some of their features into our products, so that as customers migrate to our products over the years, they would have everything there, plus more, in the Oracle product.”

The president of the Oracle Applications Users Group endorsed the deal.

“Oracle Corp.’s offer to purchase PeopleSoft Inc. would have a positive long-term impact on Oracle applications users,” said Arthur Hunt, through a spokesman. “We would expect the purchase to expand Oracle’s ability to produce new applications (and) improve existing ones.”

Gartner Inc. analyst Ted Kempf, in Chicago, said a merger would be a bad thing, from the perspective of PeopleSoft’s customers.

“I don’t think (Oracle is) interested in developing the products. They just want the support revenue. If you’re a diehard PeopleSoft client, you’d have to migrate to Oracle or something else.”

But IDC analyst Albert Pang thinks Oracle would be sensitive to the needs of PeopleSoft’s customers.

“They’re not going to abandon more than 4,000 of these blue-chip customers,” he said.

The bid likely took PeopleSoft by surprise, several analysts said, noting that PeopleSoft would probably not have proceeded with Monday’s announcement of its intended J.D Edwards & Co. buyout if it had seen Oracle’s attempt coming. [See, “PeopleSoft announces plan to acquire J.D. Edwards,” June 3.]

Whether Oracle is serious in its offer is another open question.

“When you look at Oracle’s positioning over the past year, and what (Oracle Chairman and CEO) Larry Ellison has been saying about the market shakeout, it’s clear he didn’t view PeopleSoft as a long-term survivor,” Yankee Group’s Dominy said.

Oracle’s offer, for a 5 percent premium on PeopleSoft’s share price, is a bit of an insult, he said. On the other hand, Dominy said he wouldn’t be surprised to see Oracle raise the offer.

Financial analysts are making similar comments.

“We suspect Oracle will need to sweeten the pot to get the deal done,” Morningstar Inc. analyst Todd Bernier wrote Friday in a research note.

Bernier predicted that if the deal is completed, it will spark a rapid consolidation of remaining vendors in the enterprise applications market, with Siebel Systems Inc. another likely candidate for takeover.

Monday’s announcement of PeopleSoft’s plans to merge J.D. Edwards into its own operations meant that Oracle Corp. would be bumped to the number-three position in the ERP (enterprise resource planning) market, behind leader SAP AG and the bulked-up PeopleSoft.

A reluctance to accept a backseat spot could have sparked Oracle’s decision to make a run on PeopleSoft, analysts said. But the massive market consolidation a PeopleSoft takeover would cause could be a red flag for federal regulators, they warned. If Oracle succeeds, it and SAP would control a sizeable majority of the enterprise applications sector.

Like Siebel, PeopleSoft has been struggling financially because of the soft economy and weak enterprise software market. Its licensing revenue dropped 40 percent year-over-year in this year’s first quarter, while its total revenue dropped 5 percent, from $483 million in last year’s first quarter to $460 million in this year’s quarter. The company has churned through several rounds of layoffs.

But if Oracle doesn’t swallow PeopleSoft, it’s unlikely any other vendors will, said Yankee Group’s Dominy. IBM Corp., SAP and Microsoft Corp. would all have the financial resources to do so, but such an acquisition wouldn’t fit into their strategic plans, he said.

“If this doesn’t work with Oracle, I think they’ll continue down the path of PeopleSoft acquiring J.D. Edwards and running on its own,” he said.

Whatever happens with Oracle’s bid, the takeover attempt is indicative of the accelerating pace and urgency of anticipated consolidation in the applications market, analysts said. IDC’s Pang called it Oracle’s “great white shark” attack, aimed as much at destabilizing the competition as at gaining share.

“It’s an audacious move,” he said. “We’ll see how it goes”

(Tom Krazit, in Boston, contributed to this report.)