PeopleSoft Relents, Agrees to Oracle Acquisition

by Alex Woodie

After a bitter 18-month battle, PeopleSoft's board of directors agreed today to be acquired by Oracle for $26.50 per share, or $10.3 billion. While the agreement will end an extremely unpleasant period for the companies and their customers, it raises new questions about the future of some of PeopleSoft's products, particularly the World ERP line, which runs only on IBM iSeries servers and is heavily relied upon by thousands of companies across the world.

The merger agreement has been approved by the boards of directors of both companies and should close by early January. As part of the deal, the two companies will cease all legal actions against each other, including a Delaware court trial to determine the legality of PeopleSoft's anti-takeover poison pill, as well as a case that PeopleSoft was bringing against Oracle for allegedly damaging its business. Presumably, Oracle was able to get PeopleSoft to drop its poison pill, which would dramatically increase the cost of an acquisition beyond purchasing all of PeopleSoft's stock.

It's still not clear what will become of PeopleSoft's employees and customers. As part of the deal, Oracle will obtain 12,750 PeopleSoft customers, about half of which PeopleSoft obtained in its acquisition of J.D. Edwards in the summer of 2003. At one point, Oracle had plans to fire about half of PeopleSoft's roughly 12,000 employees, but it has since softened that stance, according to reports.

George "Skip" Battle, chairman of PeopleSoft's transaction committee, said the company believes Oracle's revised offer of $26.50 provides good value for PeopleSoft stockholders. "PeopleSoft is a strong and vibrant company," he says. "This has been a long, emotional struggle, and our employees have consistently performed well under the most challenging of circumstances."

The agreed-upon price of $26.50 per share represents a 10 percent premium over PeopleSoft's closing price on Friday, and a 75 percent premium over PeopleSoft's market value before Oracle first launched the takeover battle, in 2003. Oracle, which also announced its quarterly financial results today, said the merger should add about 1 cent per share to its bottom line starting in the fourth quarter of its fiscal year, and 2 cents per quarter in fiscal 2006. For its third quarter ending November 30, the company earned $815 million, or 16 cents per share, a 32 percent increase from the same period last year.

What Will Become of World?

For thousands of former J.D. Edwards customers, the bad dream started in June 2003. Five days after J.D. Edwards, then the industry's fourth-largest ERP software vendor, with annual revenues of about $850 million, agreed to be acquired by the third-largest vendor, PeopleSoft, for $1.7 billion, Oracle, the second-largest ERP vendor, launched a $5.1 billion hostile takeover bid of PeopleSoft, sans J.D. Edwards. PeopleSoft, determined not to let Oracle's offer derail its acquisition of J.D. Edwards, fiercely opposed the offer, thus beginning the acrimonious struggle that pitted PeopleSoft's chief executive, Craig Conway, against his former boss, Oracle Chief Executive Larry Ellison.

Ellison did not help the situation early on when he said that Oracle would stop enhancing the PeopleSoft products and force PeopleSoft's customers to move to Oracle's products (a move that undoubtedly hurt PeopleSoft's sales and led to a lawsuit by PeopleSoft and to the fall of Conway, who had misled shareholders when he told them Oracle's bid was not hurting business). Oracle executives have since relented and have agreed to enhance PeopleSoft's products.

In March 2004, Oracle's co-president, Charles Phillips, sought to bolster the vendor's image in the eyes of former J.D. Edwards shops by attending a regional meeting of the Quest user group. Although Phillips committed to supporting the former JDE applications and the iSeries, his statements of conditional support left something to be desired (see "Oracle Pledges Conditional Support for JDE Apps, iSeries"). More recently, at Oracle's convention last week, the company pledged to "over-support" the PeopleSoft products, although actual details of that promise were scarce.

Despite the promises, and because of the mixed messages, PeopleSoft's JDE customers don't have much faith in Oracle as a custodian of their World and EnterpriseOne applications. According to a recent study by AMR Research, 47 percent of JDE shops surveyed expect Oracle to offer no new functions in their software if the company takes over PeopleSoft, with another 17 percent expecting only minor tweaks and changes.

In its announcement today, Oracle said it would continue to support and enhance PeopleSoft's Enterprise and EnterpriseOne product lines, but it made no mention of World. "We intend to enhance PeopleSoft 8 and develop a PeopleSoft 9 and enhance a J.D. Edwards 5 and develop a J.D. Edwards 6," Ellison said. "We intend to immediately extend and improve support for existing JD Edwards and PeopleSoft customers worldwide."

Oracle representatives did not respond to repeated requests for comments concerning its plans for supporting World.

So is it possible that Ellison and Oracle simply forgot to mention World in his statement about supporting the PeopleSoft products? It's possible, but not likely.

World is tightly bound to the iSeries server and runs only on OS/400, an operating system that features its own integrated relational database, called DB2 UDB for iSeries, or DB2/400. Obviously, it would not be in Oracle's best interest to sell an ERP system that makes money for IBM, which it competes against in the database and middleware markets. At least with the Enterprise and EnterpriseOne product lines, other operating systems, databases, and hardware can be used, but that is not an option with World, which requires OS/400, DB2/400, and the iSeries. World is also coded in RPG, a programming language that Oracle knows very little about.

For many of PeopleSoft's former JDE customers, a better answer may lie in the growing market for third-party support. Companies like TomorrowNow, which recently announced plans to provide basic World and EnterpriseOne maintenance starting in 2005, are ramping up their support businesses in expectation of an influx of new business from PeopleSoft's former JDE customers. Stay tuned in early 2005 for an in-depth article on third-party support options in The Four Hundred newsletter.