Oracle tightens loop around Peoplesoft

Jeffrey Goldfarb

NEW YORK: Despite continued skepticism from Wall Street and Silicon Valley, Oracle Corp. plans to plow ahead with its attempt to buy business software maker PeopleSoft Inc., regardless of what obstacles may block its path.

The world's second largest software company is drawing up plans to nominate a slate of directors to run for PeopleSoft's board, should the fight get that far. Its lawyers also are readying a defense for any possible regulatory opposition to the $7.3 billion deal, said people familiar with the plans.

Analysts and investors said they think Oracle will have to pony up more than the $19.50 per share it is offering to spur shareholders to rid the company of its poison pill anti-takeover defenses -- if and when it gets antitrust clearance for the acquisition from the United States and Europe.

Oracle has said it sees no reason to discuss any change in price now, but the company signalled some flexibility over the summer on the condition that PeopleSoft negotiate a friendly deal, people familiar with the talks said.

Redwood Shores, California-based Oracle offered more than $100 million in the form of a break-up fee to help underwrite any risk of regulatory opposition, and also invited PeopleSoft to name its own break-up fee figure, these people said.

Oracle "made multiple entreaties to PeopleSoft that there was flexibility in a number of areas, which were rebuffed," one person said.

PeopleSoft officials denied that Oracle ever offered any such flexibility. The board reviewed and rejected the initial $16-a-share offer and the sweetened $19.50-a-share bid.

"Beyond that, there has been no phone conversation, meeting or exchange whatsoever between PeopleSoft and Oracle," a PeopleSoft spokesman said.

Oracle's swashbuckling chief executive, Larry Ellison, professed his determination to complete the takeover in an interview with Reuters last week, although he did not discuss or address any of the details outlined by other sources.

"However long it takes, we're going to hang in there," Ellison said. "I don't think there is any doubt that we will get the company. We will get PeopleSoft."

That contrasts starkly with the view of PeopleSoft CEO Craig Conway. He pronounced the deal "dead" in an interview with Reuters last month.

Meanwhile, U.S. officials have begun questioning Oracle's customers, a move that attorneys say could -- but doesn't definitively -- signal they are preparing to block the deal.

Also, PeopleSoft on Monday said its quarterly profits would be higher than originally anticipated, which could add another complication to Oracle's bid.

Some think Oracle would walk away if its shares continue to underperform its peers or if its focus on PeopleSoft distracts it from other possible deals. Its interest also could cool if the battle forces it to further scale back its usually aggressive share repurchase efforts.

"Oracle would be faced with the need to use all its cash and liquidity just for PeopleSoft, and we think that would be extremely foolish," said Tom Burnett, head of Merger Insight, the research arm of brokerage firm Wall Street Access.

"It also would sop up all the ammunition that Oracle would have had to continue its buyback program," he added.

Oracle has spent about $9 billion buying back more than 600 million shares over the past three-and-a-half years, Burnett said. In the most recent quarter reported, Oracle spent less than one-third of what it did in the year-ago period buying back its shares, he added.

Others, including Sanford Bernstein analyst Charles Di Bona, said Oracle eventually might see that it cannot afford to let other deals slip by as it fights to acquire PeopleSoft. He said he thinks Oracle would do better to try to buy a maker of so-called middleware, which stitches software together.

"Are 5,500 PeopleSoft customers more important to them than straightening out the middleware space where they've had trouble penetrating?" Di Bona said. "Supply lines are stretched too thin. Oracle should be bolstering the supply line rather than trying to increase the beachhead."

When Oracle launched its offer for PeopleSoft in June, many investors and analysts speculated that Ellison merely wanted to scuttle PeopleSoft's plans to buy rival J.D. Edwards, which it had announced just days earlier.

Oracle said it would not continue to sell PeopleSoft products to new users, but would support existing ones, which raised more eyebrows about its motives. Oracle, long a proponent of building from within, also has never executed an acquisition anywhere near the scale of its bid for PeopleSoft.

Oracle says the technology landscape has shifted, that customers want to deal with fewer vendors and that it is in the best position to provide the ultimate business software suite.

© Reuters