Oracle's Acquisition of PeopleSoft

chillibreeze writer — Avimanyu Datta

On December 13, 2004, PeopleSoft succumbed to a $10.3 billion bid from Oracle. Under the terms of the deal, Oracle would acquire PeopleSoft for $26.50 per share. The announcement followed a tender offer in which more than 97% PeopleSoft shareholders tendered their stock. Post-merger, Oracle emerged as the second largest manufacturer of Business Application Software in the world, next to SAP.

Oracle’s acquisition of PeopleSoft materialized after 18 months of struggle, which began on June 6, 2003 when Oracle first made a hostile attempt to acquire PeopleSoft. In July 2003, PeopleSoft acquired JD Edwards. Oracle had initially announced it would discontinue PeopleSoft’s products. Later on, however, the company changed its stand.

Oracle’s Rationale Behind the Acquisition

In the late 1990s, the technology boom led to the rapid growth of the global software industry. This witnessed a mushrooming of numerous specialized business-software developers. With the industry facing a recession in the early 2000s, there were too many software developers and not many customers. This would shrink the profit margins.

The enterprise application business was facing a downturn, especially at the high end of the market. Commenting on the industry standard scenario, Evan Quinn, an analyst at IDC, said, “After years of growth and many more suppliers entering the market, a massive wave of consolidation was quite imminent due to glut of players, increasing customer expectation for innovation and the resulting pricing pressures in a $20-40 Billion business application enterprise software industry”.

Industry research firms like AMR research (AMR) projected that new software license sales for core enterprise resource application would increase by only 3%. For the fiscal year 2003, Goldman Sachs revised its growth in technology spending estimates from 2.3% to merely 0.4%. ERP players faced problems in acquiring new customers because roll-outs were costly and re-deployments were time-consuming.

Increased Customer Base and Product Portfolio

Oracle wanted to tap new growth business by acquiring PeopleSoft. It wanted to target PeopleSoft’s customers who were using databases of IBM and Microsoft and sell them its own database products. Oracle’s strength combined with that of PeopleSoft’s could thus be used to bring sales in for other Oracle applications that were nearing saturation. Exhibit 1 and Exhibit 2, give the product portfolio of Oracle and PeopleSoft, prior to the acquisition, respectively.

The acquisition would enable Oracle to capture the Enterprise Application software business, used by large companies. Explaining Oracle’s interest in the takeover, Larry Ellison, CEO, Oracle, mentioned. “To make better products we have to spend more on engineering, and the only way to do that while lowering our price was to have a larger installed base. We chose acquisition detection as the only way to grow our business so we could increase our investment in engineering.”

After going through a list of prospective acquisitions in BEA, Siebel Systems, and Business objects, Oracle zeroed in on PeopleSoft, for its larger customer base. In fact, as of December 2004, PeopleSoft had a greater market share on ERP than Oracle (Exhibit 3). Oracle’s objective was to enhance customer base for their applications and increase sales across varied industries. By acquiring PeopleSoft, Oracle would almost double its customer base and become the largest application vendor in the U.S. It would also strengthen its presence in segments like healthcare and government. Oracle’s acquisition of PeopleSoft would provide Oracle’s customers with a one-stop global shop for databases, applications and other technologies. Oracle’s customer base would attract Independent Software Vendors (ISV) in increased numbers. Analysts felt that Oracle might also narrow its market share gap with SAP.

Effect on Oracle’s Shareholders

The acquisition would benefit Oracles shareholders through increased investments in innovation and providing superior solutions to customer needs and lower processes. The acquisition could mean increase in economies of scope and economies of scale.

The Acquisition from PeopleSoft’s Standpoint

While prospects were great on Oracle, the same cannot be said for PeopleSoft. For 18 months they had been rejecting Oracle’s idea of a hostile take over. While there was confusion among customers as to whether they have to migrate to Oracle products, shareholders were concerned about their investments. The acquisition deal also highlighted the conflict of interests among PeopleSoft customers, management and shareholders.

Contradiction between Management and Shareholders

The management said that it had installed legal obstacles against Oracle to benefit its shareholders from Oracle’s proposal. They said that these were important safeguards against acquisition at an unfair price. The management also installed a legal action “Customer Assurance program” (CAP) to protect PeopleSoft’s product lines from being terminated. PeopleSoft’s shareholders, however, did not believe in the management’s argument. In fact, a group of shareholders filed a lawsuit accusing the management of intransigence and acting against the interest of the shareholders. The shareholders believed that CAP would reduce share price gains as a result of the takeover bid.

On November 1, 2004, Oracle made its final offer of $9.2 billion at $24 per share. PeopleSoft made attempts to convince its shareholders that the value of $24 per share was less than the real value. The board promised its shareholders good financial returns for the fiscal year 2005, eventually leading to superior shareholder value. In addition it tried to avoid the takeover by Oracle. Oracle mentioned that if 50% shares were not tendered to the offer, it would stop making further attempts. Extending the final offer to PeopleSoft’s shareholders, Jaffrey O. Henley, Chairman of the Board of Oracle mentioned “… we believe our offer represents a substantial premium to the price at which those shares would trade without Oracle’s offer”.

The shareholders went to the extent of tendering their shares to Oracle against the wishes of the management. Individual investors held about 20% of the PeopleSoft’s Stocks, PeopleSoft investors held 10%, and institutional investors held the remaining 70%. After accepting the offer, California Employees’ Retirement System, the largest pension fund in U.S. tendered its $1.5 million shares to Oracle. Los Angeles based Capital Guardian Trust company and its parent company Capital Group International, also tendered their 10.2 % shares to Oracle. 60% of the shareholders supported the bid. Despite the support from 60% stockholders, the board of PeopleSoft insisted that the price offered was inadequate. Oracle revised the amount to a $10.3 billion bid for $26.50 per share. The announcement followed a tender offer in which more than 97% PeopleSoft shareholders tendered their stock.

Customers

The customers were reluctant to make significant software investments in PeopleSoft’s products, as they believed that the takeover would result in reduced support, and migration into Oracle’s platform. In other words, PeopleSoft users viewed the acquisition as a threat to the feasibility of their application software. Many customers believed that the deal was not to their benefit. They accused the management and shareholders of translating the takeover as an opportunity to make money, leaving the customers stranded. However, some analysts felt that the deal might benefit the customers.

Oracle had assured PeopleSoft Customers that it had no intentions of making them migrate to Oracle products. According to Ellison’s plan, Oracle would continue deployment of PeopleSoft’s 8.9 applications in 2005. In addition, Oracle planned to introduce the PeopleSoft 9.0 and JD Edwards 8.12 in 2006. In fact, Oracle promised that it would support both PeopleSoft and JD Edwards product lines till 2013.

Looking Ahead: Effect of the Acquisition on Product Lines, Customers and Competitors

Once the deal was done, there was speculation among industry experts about the prudence of the decision. Although, the deal could give better market reach but analysts were skeptical due to the fact that PeopleSoft’s licensing revenues had dropped by 18%. Some analysts felt that that $10.3 billion was too expensive a deal for Oracle. Commenting on the deal, David Yockelson, a Meta Group analyst said, “There is definitely a risk if it doesn’t pay off. It’s not a bad move, but it is fairly an expensive one. Oracle for some reason decided not to back off and they paid an exorbitant price. No one has ever tried integration like this, and Oracle has no track record of acquisition.” Oracle however, defended the price, citing that there was value in the extra spending, in terms of striking a “friendly deal”. The flip side of the deal was that Oracle would have to cut down on the sales team of the merged entity and would target existing customers for sale of other applications.

According to Ellison’s plan, Oracle would continue deployment of PeopleSoft’s 8.9 applications in 2005. In addition, Oracle planned to introduce the next generation PeopleSoft 9.0 and JD Edwards 8.12 in 2006. In 2006 Oracle was also expected to release Version 12 of its own E-Business Suite. In fact, Oracle promised that it would support both PeopleSoft and JD Edwards product lines till 2013. Oracle also promised to support rival database technologies, including IBM’s DB2, and Microsoft’s SQL server. Exhibit 5 details Oracle’s plan of introducing, integrating product lines.

In its effort to integrate the products successfully, Oracle launched “Project Fusion”, aimed at supporting acquired technology from PeopleSoft and JD Edwards, and developing the next generation merged products. In the long term, Oracle planned to transfer various functions to its own E-Business suite 11i, making a more advanced set of applications.

Citing the benefits of the consolidation, Ellison mentioned, “The joint company will have a larger consumer base, expanded brand reach, critical mass in more industries, and be able to provide substantial business support. He also added, “Most important the combined company will be more competitive against SAP, Microsoft and a wave of new outsourcing companies. Further, Ellison added, “This merger will work because we will have more customer base, which increases our ability to invest more in applications development and support. We intended to enhance PeopleSoft 8.0 and develop a PeopleSoft 9.0 and develop a JD Edwards 6. We intend to immediately extend and improve support for existing JD Edwards and PeopleSoft customers worldwide.”

Ellison mentioned that Oracle is well placed to take on its main rival, SAP. The main reason was that Oracle had the largest application customer base in North America, and after the acquisition, its combined application would be in open source Java. In contrast, SAP application was based on a proprietary language - ABAP, and a proprietary set of applications. The acquisition elevated Oracle to second position in the 22 billion Enterprise Management software market after SAP, the market leader. Peter C. Smith, President Ottawa Oracle User Group mentioned, “For Oracle, in general, I would see this as a very good addition to the existing application suite, and they needed something like this to compete with SAP.”

Some industry experts felt that Oracle’s product integration and support strategy were not convincing. Paul Hamerman, VP of Enterprise application, Forrester research, said, “While they say that these products will be supported until 2013, they also said that they will continue to follow existing PeopleSoft support schedule, with some modifications. Various releases over the time will be de-supported, so customers will have to continue to upgrade applications periodically in order to be supported. Eventually they will encourage migrating to the next generation product.” Another expert Joshua Greenbaum, principal at Enterprise Application Consulting in Berkeley, California, voiced the same concern, “The customers should interpret as rethinking their PeopleSoft application choice. PeopleSoft customers will have a big decision point around 2008 as to what they do with their product strategy, because, clearly, PeopleSoft 9 is a dead end”.

In the light of significant confusion over Oracle-PeopleSoft merger, it can be logically argued that the SAP may stand to benefit. Due to prolonged uncertainties over takeover tussles SAP should find it easy to acquire new customers. In fact, post-acquisition it could acquire those customers who are reluctant to migrate to the merged entity’s software. One can also be skeptical that customers would quit buying PeopleSoft’s products, as they did with J D Edwards after it was acquired by PeopleSoft. Pointing out to the degree of toughness of the task, David Dobrin of B2B Analyst in Cambridge, Massachusetts remarked, “Oracle now takes on the job of managing three different product lines in an area it has never shown much aptitude for. Oracle will be doing that while battling a strong competitor like SAP.”

Lessons learnt

Most cases on mergers and acquisitions cite economies of scale and increased market share as possible benefits, be it a car company taking over another or an FMCG giant acquiring another player. The argument really holds true for the manufacturing and consumer goods sector. In software, however, the major cost of building comes in the design phase, unlike other classical engineering artifacts where manufacturing truly adds to the maximum value in the value chain. So economies of scale may not be achieved through acquisition in the enterprise software market. However, it could happen provided Oracle through its procurement, wanted to get hold of PeopleSoft’s knowledge system which will result in the design of Enterprise software. This is called procurement of innovations. But no such intention was cited.

Now let’s consider the issue of increased market share. When an FMCG product line acquires another one (e.g. P&G’s acquisition of Gillette), the market share is bound to increase. A consumer would not inspect a Gillette product to see who owns the parent brand. The reason: the function performed by Gillette products is simple and well-defined. That function is not dependent on any changes in ownership. With software systems, particularly in case of ERP, there are complex system integration issues relating to interpretability and compatibility among systems of various platforms. So a major issue for existing customers would be the service of PeopleSoft products, their inter-operability with Oracle products and vice versa. In such a case, the skepticism in users’ and customers’ minds would lead them to procure systems from a rival product. So the result of this multi billion dollar procurement may not yield that much value in terms of generating new customers. On the contrary, some of the existing customers of Oracle and PeopleSoft portfolio may shift to SAP products.

Exhibit 1: Oracle’s Product portfolio prior to the Acquisition

Product	Description
Oracle Databases	Industry’s first database deigned for Grid computing. Suitable for Large, Medium and small enterprises
Oracle Applications	Oracle E-Business suites automate, streamlines, and simplifies business processes and puts all business information in one place to enable enterprises to share high quality consistent data in real time.
Oracle Application Server	The first application server that integrates everything for development and deployment of e-business portals, transactional applications and Web services.
Oracle Collaboration Suite	An integrated system for all organizational communication and information needs including web conferencing, files, email, voicemail, fax and wireless.
Oracle Enterprise Manager	A single, integrated product for monitoring and managing Oracle software infrastructure as well as application and business service in diverse IT environments.
Oracle data Hub	Synchronizes information centrally, from all systems to enable an accurate, complete and consistent view of a company’s data from packages legacy or custom applications.
Oracle development tools	A complete, integrated environment that combines application development and business intelligence.

Source. Chaturvedi, R.N. (2005). Oracle’s Acquisition of PeopleSoft. ICFAI center for Management research. European Case Clearing House. Case no.305-169-1

Exhibit 2. PeopleSoft’s product lines prior to acquisition

Product	Description
PeopleSoft Enterprise	A family of applications based on Pure internet architecture designed for flexible configuration, and open multi-vendor integration. Ideally suited for financial, government, education, health care and other services.
PeopleSoft Enterprise One	A complete suite of modular, pre-integrated industry-specific business applications designed for rapid deployment and ease of administration on a pure Internet architecture. Suitable for organizations that manufactures, constructs, distributes, services, manages product or physical assets
PeopleSoft Word	An application suite for IBM iSeries platform. Applications are tightly integrated and pre-bundled on a single database, with a web-enabled architecture.

Source. Chaturvedi, R.N. (2005). Oracle’s Acquisition of PeopleSoft. ICFAI center for Management research. European Case Clearing House. Case no.305-169-1

Exhibit 3. ERP market share before the Acquisition

Source: After 18 months battle, oracle finally wins over PeopleSoft. The Wall Street Journal online, December 14, 2004.

Exhibit 4. PeopleSoft Share Prices and Oracle’s Offer

Date	PeopleSoft’s Market price for the Month (Per Share in $)	Price offered by Oracle(Per Share in $)
June 6, 2003	17.56	16
June 16, 2003	21.58	19.50
February 4, 2004	21.58	26
August 27, 2004	17.4	21
November 01, 2004	23.61	24

Sources: http://uk.finance.yahoo.com, http://moneycentral.com

Keerthy, Blessy (2005). Oracle’s Bid for PeopleSoft: PeopleSoft’s Combat strategies. ICFAI business School Case Development Center. European Case Clearing House. Case no. 305-230-1.

Exhibit 5 Timeline of product releases

Product	Future version Timeline
PeopleSoft Enterprise 8.9	By 2005
Oracle E-Business suite 12	By 2006
PeopleSoft Enterprise 9	By 2006
JD Edwards EnterpriseOne 8.12	By 2006
Ongoing JD Edwards World	Continuous
First project fusion components	By 2006
Initial Project Fusion Application	By 2007
Future Fusion Applications	By 2007
Products	Customer Support timeline
PeopleSoft Enterprise, JD Edwards enterpriseOne and JD Edwards World	Up to 2013
JD Edwards EnterpriseOne XE and 8.0	Up to February 2007
PeopleSoft’s other products and versions, including JD Edwards World	To be retired
Currently Supported hardware platforms databases and operating systems	Continuous

Source: www.oracle.com
Chaturvedi, R.N. (2005). Oracle’s Acquisition of PeopleSoft. ICFAI center for Management research. European Case Clearing House. Case no.305-169-1

Exhibit 6
Oracle-Consolidates Statements of Operations

Source: Oracle Annual Report http://www.annualreports.com/Results.aspx?alpha=o

References
14. Babock, Charles. (January 18, 2005). Oracle details fusion Plane for Oracle, peopleSoft Apps. Retrieved from www.informationweek.com

15. Chaturvedi, R.N. (2005). Oracle’s Acquisition of PeopleSoft. ICFAI center for Management research. European Case Clearing House. Case no.305-169-1

16. Cowley, Stacy. (December 14, 2004). So is the Oracle Purchase going to work? IDG news. www.techworld.com

17. Cowley, Stacy. (December 14, 2004). Oracle faces daunting challenges integrating PeopoeSoft. IDG news

18. Connie, Guglielmo (November 20, 2004). Oracle wins PeopleSoft’s shareholders support for Bid. Retrieved from www.quote.bloomberg.com.

19. Garner, Rochelle. (September 9, 2004). Court squashes Government case against Oracle. Retrieved from www.crn.com.

20. Glass Jennifer. (November 1, 2004). Oracle Announces Best and Final PeopleSoft offer of $24 per share. Retrieved from www.oracle.com

21. Goff, John (June 19, 2003). Why Oracle Spammed PeopleSoft. Retrieved www.cfo.com

22. Keerthy, Blessy (2005). Oracle’s Bid for PeopleSoft: PeopleSoft’s Combat strategies. ICFAI business School Case Development Center. European Case Clearing House. Case no. 305-230-1.

23. Madpati, R. (2005). Oracle’s PeopleSoft Bid (Part D). ICFAI Knowledge Center. European Case Clearing House. Case no. 305-072-01

24. Songini , Marc L..(December 13, 2004). Oracle buyout gets mixed reviews from PeopleSoft customers. Retrieved from www.computerworld.com.

25. Vaas, Lissa. (January 19, 2005). Project Fusion is the death Knell for PeopleSoft Applications. Retrieved from www.eweek.com

26. Weil, Nancy. (November 19, 2004). Calpers tenders PeopleSoft shares to Oracle. Retrieved from www.nwfusion.com

27. Westervelt, Robert (September 15, 2004). Oracle DBAs see jobs, benefits to PeopleSoft takeover. Retrieved from www.searchoracle.techtarget.com.

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