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Oracle clears hurdle to pursue PeopleSoft

By Kristi Heim
Seattle Times business reporter

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The decision clears a hurdle for Oracle in its bid to consolidate power in a growing market where Microsoft and other software titans want to compete. Microsoft officials testified during the one-month trial in San Francisco, and part of the outcome hinged on whether Microsoft was actually competing in the same market as Oracle and PeopleSoft.

The Justice Department and 10 states had sued to block Oracle, based in Redwood Shores, Calif., contending the deal would harm competition and allow Oracle to raise its prices.

PeopleSoft has waged a heated battle against Oracle's bid, introducing a so-called "poison pill" to return to customers up to five times their licensing fees after a takeover.

"This decision puts the onus squarely on the board of PeopleSoft to meet with us" and to remove their poison pill so that the shareholders can accept the offer, Oracle Chairman Jeffrey Henley said in a statement.

PeopleSoft said its board would review the ruling by U.S. District Judge Vaughn Walker. The company noted it had unanimously rejected all of Oracle's offers, including the current offer to buy PeopleSoft for $21 a share, as "inadequate from a financial point of view."

PeopleSoft is suing Oracle for damages of more than $1 billion in a lawsuit scheduled to go to trial before a California jury Nov. 1. That suit alleges Oracle has deliberately waged a campaign to mislead PeopleSoft's customers and disrupt its business.

The Justice Department said it was disappointed by yesterday's decision. "We believe the facts and evidence in this case support our position that Oracle's proposed acquisition of PeopleSoft would result in a substantial lessening of competition," said R. Hewitt Pate, assistant attorney general in the antitrust division.

The department now must decide whether to appeal.

Separately, the European Commission is reviewing Oracle's bid.

During the case, which culminated in trial this summer, Oracle lawyers argued the company needed to buy PeopleSoft to compete with other large vendors and with the growing threat posed by Microsoft. All seek a share of an estimated $20 billion market for business applications, software companies use for everything from accounting to human resources.
 
The Justice Department countered that Microsoft lacked the resources to play in the same segment of the market, targeting its products mostly to small and medium-sized businesses. Oracle's acquisition would reduce the number of competitors from three to two — Oracle and German software giant SAP, the Justice Department argued.

But the trial revealed Microsoft had been in negotiations to buy SAP. The Justice Department failed to prove that products from other companies, including Microsoft, do not compete with the products from Oracle and PeopleSoft, Walker said in a 164-page ruling.

Walker had some particularly harsh words for Doug Burgum, Microsoft's senior vice president in charge of its business-software unit. Burgum testified at the trial that Microsoft is focused on selling to small to mid-sized companies — those with 50 to 1,000 employees — and had no plans to expand its products for large corporations.

But the court had already heard Microsoft was at one time in talks to buy SAP, one of the largest makers of accounting and human-resources software. The German company has 30,000 employees.

When asked about SAP in court, Burgum said the main reason Microsoft wanted SAP was not to enter the big-business market — thereby competing with Oracle or PeopleSoft — but to make it easier for customers to work with data in SAP's products, according to the ruling. In other words, he said, Microsoft wanted to buy SAP to help its Office programs communicate better with SAP's programs.

In his ruling, Walker said he gave "little weight" to Burgum's testimony attempting to prove Microsoft's absence from the corporate market. Burgum's "Uriah Heep-like humility" was unconvincing he said, referring to a character in the novel "David Copperfield" known for being insincere and obsequious.

"It strains credulity to believe that Microsoft would offer billions of dollars to acquire SAP merely to make data processing easier for customers who use both Microsoft Office and SAP," Walker wrote.

A Microsoft spokeswoman said the company would not comment on yesterday's ruling.

Analysts said the ruling puts pressure on PeopleSoft's board to relent but is by no means the last word.

"It's an important and pretty significant decision," said Wells Fargo Securities analyst Eric Upin. "It's quite unusual for a Justice Department decision to be overturned."

The software industry is at the beginning of what could be a significant wave of consolidation, Upin said. "When you really look at Microsoft, IBM, Oracle, SAP — we're starting to see these giant titans line up with these big vertical offerings of software."

Microsoft three years ago purchased Great Plains and Navision, companies that make business-application software. Now it could be poised to make another buy as a competitive response to Oracle, Upin said.

PeopleSoft shares jumped 14 percent in after-hours trading to $20.41. Oracle shares rose 2.4 percent after hours to $10.17. The ruling was issued after the stock market closed.

Seattle Times technology reporter Kim Peterson contributed to this story. Kristi Heim: 206-464-2718 or kheim@seattletimes.com.