Case Details:

Case Code : 1012 / MERGER ACQUISTIONS

Case Lengthh : 5 PAGES
Period : 2000 -2005
Organization : Oracle, PeopleSoft
Pub Date : 2005
Teaching Note : Available (3 pages)
Countries : United States
Industry : Information Technology and Related
Services

The case gives a detailed account of Oracle Corporation's successful attempt to

acquire PeopleSoft, one of the world's leading enterprise software companies. It
explores the circumstances and the reasons that led Oracle to launch a hostile
takeover bid for acquiring controlling equity stake in PeopleSoft. The case also
examines the defense strategies used by PeopleSoft to prevent this takeover
attempt.

Finally, the case describes the benefits from the deal to Oracle, PeopleSoft's
management, its shareholders and its customers. The challenges facing Oracle to
make this takeover deal successful are also highlighted.

Issues:

» Examine the reasons that led Oracle, one of the world's leading software
companies, acquire PeopleSoft.

» Gain insights into the global Enterprise Application Software (EAS) industry.

» Study the defense strategies adopted by PeopleSoft to thwart Oracle's hostile

takeover.

» Analyze the synergies of Oracle-PeopleSoft merger deal.

» Analyze the role of PeopleSoft's board in the takeover battle.

» Study the benefits to Oracle and PeopleSoft from the takeover deal.

The combination of these two companies brings together some of the best products and
people in the enterprise applications market, all for the benefit of the customer." 1

- Larry Ellison, Chief Executive Officer, Oracle Corporation.

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"After careful consideration, we believe this revised tender offer provides good value
for PeopleSoft stockholders. PeopleSoft is a strong and vibrant company." 2

- George Battle, Chairman, PeopleSoft's Transaction Committee.

Introduction

On January 07, 2005, Oracle Corporation, the second largest software company in
the world, announced that it would acquire PeopleSoft Inc.3 at $10.3 bn.

The announcement followed a tender offer in which more than 97 percent of

PeopleSoft's shareholders tendered their stock. Post-merger, Oracle would emerge
as the second largest manufacturer of business application software in the world.

Oracle first made its hostile bid to acquire PeopleSoft on June 06, 2003. Meanwhile,
in July 2003, PeopleSoft acquired JD Edwards.4 Oracle's acquisition of PeopleSoft
finally materialized after an 18-month struggle between the two companies that
involved multiple litigations and bitter exchanges between Oracle's Larry Ellison
(Ellison) and the then PeopleSoft's CEO Craig Conway (Conway).

The acquisition was unique in many ways. It raised corporate governance issues
when Peoplesoft's shareholders opposed the use of poison pills by the company's
management. It also led to debates regarding the use of poison pills and whether
prevailing regulations required a review. It brought defeat to the US Department of
Justice (DOJ) in an antitrust case, thus encouraging bigger consolidations in the
software industry, in future.

It was also one of the most widely analyzed acquisitions due to the hostility involved,
its huge scale, multiple litigations, and the deal price.

Oracle had initially announced that it would discontinue PeopleSoft's products.

Later, the company changed its stand and stated that it would support the products
and would not drop them immediately. Most analysts expressed doubts on the
success of the merger.

However, Ellison was confident that it would work, "This merger works because we
will have more customers, which increases our ability to invest more in applications
development and support."5

In 1977, Ellison along with Bob Miner & Ed Oates founded Software Development
Labs (SDL).

They started providing consulting for a handful of corporate clients. Ellison came
across a paper called "A Relational Model of Data for Large Shared Data
Banks"written by EF Codd at IBM. Though IBM was itself unconvinced by the
commercial viability of the model, Ellison was fascinated by the concept and was

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struck by its business potential.

He decided to commercialize the technology of relational databases. In 1979, SDL

was renamed Relational Software Inc. (RSI). The company released its first
database program compatible with both mainframe and desktop computer
systems. In 1983, RSI changed its name to 'Oracle Corporation' to reflect its
flagship product Oracle Database Version 3.

In 1980, Oracle had only eight employees and its revenues were less than $1 million.
In 1981, IBM adopted Oracle's SQL for its mainframe systems and for the next
seven years, Oracle's sales doubled every year.

Oracle went public in 1986, raising $31.5 million with its initial public offering
(IPO). In 1987, when the packaged business application segment was just taking
shape, Oracle launched its business application division and thereafter released its
financial and project-management modules. A year later, in 1988, the company
released its Oracle Database Version 6 with new features like online backup, but
the version fell short of market expectations on the reliability aspect.

By 1990, Oracle reported earnings of US$970.8 million. However, the third quarter
of fiscal 1990 was a bad quarter for Oracle as the company posted its first losses
after years of growth. The market capitalization of the company fell by 80 percent
and it was on the verge of bankruptcy

The Tender Offer

On June 06, 2003, Oracle announced its bid to acquire PeopleSoft for $16 per share
or approximately $5.1 billion in cash. The offer was made just four days after
PeopleSoft had announced its decision to buy JD Edwards for $1.7 billion in stock.

On June 12, PeopleSoft rejected Oracle's offer. It filed a suit in a Californian state
court, accusing Oracle of damaging its business and sought $1 billion in damages. It
also charged Oracle with disrupting its ongoing acquisition of JD Edwards.
PeopleSoft attributed Oracle's move to the fact that it had been continuously
registering market share gains against Oracle in the previous couple of years. On
June 18, Oracle raised its bid to $19.50 per share or about $6.2 billion. Two days
later, PeopleSoft again rejected the offer. On June 30, the US DOJ began
investigations into the Oracle offer. Meanwhile, on July 18, PeopleSoft completed its
acquisition of JD Edwards. Oracle later increased the acquisition bid to about $7.5
billion...

The Rationale

In the late 1990s, the technology boom led to the rapid growth of the global software
industry, which witnessed a mushrooming of numerous specialized business-

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software developers. With the industry facing a recession in the early 2000s, there
were too many software vendors but not enough paying customers...

The Antitrust Trials

On June 30, 2003, the DOJ started its investigations into Oracle's acquisition bid. It
filed a suit on February 26, 2004, to challenge the proposed merger pursuant to
Section 7 of the Clayton Act . The trial began in June 2004. From the DOJ's
viewpoint, Oracle's bid was an attempt to eliminate its major competitor. The DOJ
expressed concern that Oracle could raise prices of its software while spending less
money on product improvements. Oracle, on its part, supported its bid as an
important measure to compete with archrivals -Microsoft and IBM...

The Defense Strategies

After EC's approval, the hurdles that still remained for Oracle were PeopleSoft's
poison pill and the company's Customer Assurance Plan. PeopleSoft had instituted
its poison pill defense in 1995. The defense allowed the company's existing
shareholders to purchase the company's stock at half price in an event of a hostile
takeover bid in which the acquirer had acquired 20 percent of the company's stock.
The Customer Assurance Plan (CAP) was adopted in June 2003 after Oracle had
made its first takeover bid. The provisions under CAP guaranteed pay back to
PeopleSoft's customers between two and five times the software licensing fees if the
company was taken over within two years or if the product support declined within
four years...

The Deal

Once the deal was finalized, industry experts started reviewing it to evaluate
whether Oracle had taken the right decision. They pointed out that PeopleSoft's
software licensing revenues had fallen by 18% in 2003 from the previous year's
figure. Moreover, for a revenue of every $100 through software sales, PeopleSoft
spent $136 in sales and marketing for financial statements of PeopleSoft)...

The Road Ahead

According to Research, the estimated financial revenues in the fiscal 2004 for the
merged entity's applications business would be $5.5 billion, commanding a 12%
market share of the worldwide enterprise applications market.

Analysts pointed to several integration challenges for Oracle's management, given

the scale of the merger for the expected risks of acquiring PeopleSoft). The fact that
PeopleSoft was not able to successfully integrate JD Edwards added to the
complexity of this acquisition...

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