News

SAP backs Oracle in federal lawsuit

• By John K. Waters
• March 8, 2004

The civil antitrust lawsuit filed last week by the U.S. Department of Justice (DOJ) in U.S. District Court in San Francisco to block Oracle Corp.'s $9.4 billion takeover bid for PeopleSoft drew responses from a number of quarters last week. Perhaps most surprising was the announcement by chief rival SAP that it agrees with Oracle's assertion that the government's definition of the market in which they compete is too narrow.

In a statement, SAP said it agreed with Oracle's view of the government's definition of the packaged application market, and observers expect the German software maker to send a letter to the DOJ asserting that the government is wrong to say that Oracle, PeopleSoft and SAP are the only companies selling enterprise-class finance and human resources software.

According to the DOJ, Oracle, PeopleSoft and SAP are the only vendors with product offerings that can meet the needs of large companies and government agencies. Therefore, the department has concluded that an Oracle-PeopleSoft merger would eliminate one of only three competitors in that market, resulting in higher prices, fewer choices and reduced innovation.

"I think the decision here was very clear," Assistant Attorney General R. Hewitt Pate said last week during a press conference. "Going from three to two companies in this market is a competitive problem that needed to be stopped. Under any traditional merger analysis, this is an anti-competitive deal."

Seven state attorneys general are reportedly joining the DOJ in the suit.

According to Philip Carnelly, research director at London-based industry analyst firm Ovum, the DOJ's decision probably won't have much impact on Oracle's chances of a successful takeover of PeopleSoft.

"Oracle's chances of success looked slim before," Carnelly said. "Now they look slimmer."

But the DOJ's action did have at least one immediate effect: Oracle has withdrawn its attempt to get any nominees elected to the PeopleSoft board at its upcoming annual meeting, scheduled for March 25. That means Oracle will not be able to turn its hostile takeover into a friendly one and get PeopleSoft's share-issuance "poison-pill" removed.

"Oracle must try to get this obstacle removed in court, as it is unlikely that shareholder pressure will alter the board's mind," Carnelly noted.

Oracle claims the DOJ's case against the merger is "without basis in fact or in law," and plans to "vigorously challenge" the suit. In its filing with the San Francisco court, Oracle argued that merging the two companies would not lead to higher prices because the bidding process is actually under the control of the customer. In other words, software companies do not always know whom they are competing against and are therefore forced to offer a low bid because they do not want to lose to anyone, the filing said. The DOJ's characterization of the business software market is "illogical and wrong," Oracle asserts.

Oracle has said that it plans to compare the DOJ's attempt to stop the merger with a similar action it took in 2001 against SunGard Data Systems, which was attempting to acquire Comdisco Inc.'s disaster recovery business. The DOJ sued to prevent that deal on the grounds that it would reduce the disaster recovery market from three major vendors to two. A federal judge rejected the DOJ's arguments and allowed the acquisition to proceed.

"We expect Oracle to continue the battle for as long as it can," Ovum's Carnelly said. "After all, it costs little [compared to Oracle's profits] and is an effective way to antagonize and distract a key competitor. It has little to lose at this point."

But, Carnelly added, the case underscores Oracle's need to look for what he called "organic growth" outside its current product range, because the company is now selling into mature, static markets in both database and applications.

"[Oracle] must know in its heart that its chances of success [in the acquisition bid] are very slim indeed," Carnelly said. "It has to jump the regulatory hurdles in the U.S. and Europe . . . and circumvent the poison pill issue. So it must branch out: options include the SME business applications market (like SAP did with BusinessOne); the content (unstructured data) management market -- something it's tried to do from time to time for more than a decade; and/or it can look to extend its middleware offerings. To satisfy Wall Street it needs to do something, and relatively soon."

Hardly surprising was PeopleSoft President and CEO Craig Conway's call for Oracle to abandon its nine-month pursuit of his Pleasanton, Calif.-based company. ". . . [T]he antitrust day of reckoning has arrived," Conway said in a statement.