Oracle v DOJ - Oracle wins - Judge rules in favor of Oracle

10 September 2004

U.S. District Court Judge Vaughn Walker sided with Oracle against the U.S. Department of Justice, which opposes the proposed merger. The agency took Oracle to court in June, charging that a PeopleSoft buyout would empower Oracle to illegally raise prices and would impair innovation in the industry. Oracle argued that it couldn't raise prices with Germany's SAP and a raft of other rivals competing against it.

In his 164-page ruling, Walker sided with Oracle on most counts: "Plaintiffs have not proved that a post-merger Oracle would have sufficient market share in the product and geographic markets" to be anticompetitive.

"Plaintiffs have not proved that the product market they allege, high-function (business software), exists as a separate and distinct line of commerce," Walker added.

The judge also said the Justice Department did not prove that the business software of "numerous other vendors," including Lawson Software, American Mangement Systems and Microsoft, does not compete with the similar products of Oracle, PeopleSoft and SAP.

In summing up his strongly worded opinion, Walker concluded, "Because plaintiffs have not shown by a preponderance of the evidence that the merger of Oracle and PeopleSoft is likely substantially to lessen competition in a relevant product and geographic market in violation of (antitrust laws), the court directs the entry of judgement against plaintiffs and in favor of defendant Oracle."

Walker said his order is stayed 10 days to permit the Justice Department to appeal.

The verdict allows Oracle to pursue its $7.7 billion hostile bid to buy PeopleSoft. Oracle, based in Redwood Shores, Calif., has been chasing its unwilling target for nearly 15 months and has spent the last six months fighting the government's antitrust suit. In reaction to the ruling, Oracle called for PeopleSoft to drop the defenses it had erected against the takeover attempt.

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

Oracle wasted no time turning up the heat on PeopleSoft. In a letter to PeopleSoft's board, Henley and CEO Larry Ellison said, "With the removal of the U.S. antitrust issue, and given our commitment to acquire PeopleSoft, we are hopeful a transaction can occur...We look forward to meeting with you at your earliest convenience to discuss our offer."

Oracle extended the deadline of its all-cash $21-per-share offer to Sept. 24. It had been set to expire Friday. PeopleSoft's shares closed at $17.95 on Thursday. They jumped 13 percent in after-hours trading, selling at $20.40.

Oracle shares closed at $9.93 and rose 2.6 percent to $10.19 in after-hours session. Walker issued his decision after the close of trading.

PeopleSoft said it will "review the implications" of the ruling and noted that it had rejected Oracle's previous offers.

In its response, the Justice Department said, "We are disappointed in the court'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 in the markets for high-function (business software)."

The department said it is "considering its options" after Walker's ruling. The government has 60 days to file an appeal. Additionally, the European Commission is weighing the antitrust implications of the Oracle bid.

Oracle and PeopleSoft both make business efficiency programs that help companies process orders, update staff records, keep their finances in order and handle myriad other business tasks. The Justice Department suit involved competition in a relatively small slice of this market--accounting and human resources systems capable of handling the requirements of large, complex corporations. Those products attract about $500 million of the more than $20 billion that companies spend each year on business applications, according to the Justice Department.

Oracle says its bid for its Pleasanton, Calif., rival was driven by increasing competitive pressure. Its quest for PeopleSoft comes as businesses return to a slower rate of information technology consumption after several years of big spending. The high-tech boom of the late 1990s created hundreds of new software companies, which are now retrenching and merging in reaction to a tougher business climate.

Oracle argued throughout the six-week trial that this new climate favors the biggest names in software, primarily Microsoft, IBM and Germany's SAP. A merger with PeopleSoft would give Oracle the scale to compete more effectively in that class and, therefore, be a boon to software buyers in the long run, the company said.

The trial also featured testimony from a slew of PeopleSoft customers and other corporate software buyers who expressed alarm over Oracle's buyout plan. Executives from DaimlerChrysler, Nextel Communications, Verizon Communications and other big companies took the stand as government witnesses, complaining that a PeopleSoft buyout could cost their companies millions of dollars in software replacement work and leave them with a limited choice of suppliers.

Rocky road to Pleasanton
Oracle still faces several obstacles, the most pressing of which is the resistence of PeopleSoft management. Oracle may need to sweeten the $21-per-share offer to put the deal on friendly terms. PeopleSoft could also invite a "white knight" to offer a counter bid. Such a buyer would be more appealing to management than Oracle, with its promises of massive layoffs.

In addition, PeopleSoft's board has erected numerous defenses against Oracle. One of them is an anti-takeover plan, a "poison pill" through which PeopleSoft can flood the market with discounted shares, if a hostile suitor acquires a certain stake in the company. The poison pill provision simultaneously dilutes the suitor's stake and makes a buyout prohibitively expensive.

Oracle is taking PeopleSoft to court in an effort to remove the poison pill. That case is scheduled to go to trial on Sept. 27 in Delaware Chancery Court.

If Oracle loses that case, its next option may be to mount a proxy fight for control of PeopleSoft's board, as it had planned to do earlier this year, before the antitrust suit. However, the company would have to wait until PeopleSoft's next director election at its annual shareholder meeting, the most recent of which was in March. But it may be a matter of time before PeopleSoft management loses, Charles Biggio, an antitrust attorney at Akin Gump Strauss Hauer & Feld.

"If you look at the history of these things, if it's something other than a regulatory block, it's difficult for a company to keep a lucrative offer away from the shareholders," the attorney said. "In many cases, these defenses don't work--or the merger turns friendly when the pot is sweetened."

In addition, Oracle has to convince regulators in Europe that the PeopleSoft deal poses no threat to competition. The European Commission, the Justice Department's counterpart, issued a preliminary statement of objections to the deal in March. Then it put a decision on hold before the U.S. antitrust trial, indicating that it could not proceed without more information from Oracle.

European regulators rarely block deals that American trustbusters approve. One notable exception was General Electric's planned $42 billion buyout of Honeywell International, which the European Commission rejected in 2001.

"Despite a few dustups between the Europeans and Americans, they're fairly consistent in how they rule," Biggio said.

With PeopleSoft's stock trading for less than $17 a share, Oracle's $21 per share, all-cash offer may appeal to a lot of shareholders and increase the pressure on PeopleSoft to reconsider the bid. In addition, PeopleSoft's case for resisting Oracle looks increasingly weak with one of its primary objections--the likelihood of regulatory opposition--now largely resolved.

Plus, PeopleSoft fell short of second-quarter earnings targets, causing securities analysts to question the company's prospects. The financial miss also called attention to PeopleSoft's troubled merger with J.D. Edwards.

The antitrust ruling is bad news for PeopleSoft's 11,700 or so employees. During the trial, Oracle President Safra Catz said her company planned to fire about 6,000 people if its buyout succeeded. PeopleSoft would absorb the brunt of the cuts. One person certain to lose his job is PeopleSoft Chief Executive Craig Conway, who has led the company's anti-Oracle campaign.

The trial has been a big resource drain on both sides. Since launching the bid last year, Oracle had spent nearly $60 million on the takeover campaign and the related antitrust trial as of May 31. PeopleSoft has spent $70 million to thwart Oracle over roughly the same period.