PeopleSoft, J.D Edwards pose dilemma for Oracle

SAN FRANCISCO: With PeopleSoft Inc.'s merger with J.D Edwards & Co. looking more likely to succeed, Oracle Corp. could be forced to scrap its hostile bid for PeopleSoft and rethink its strategy for driving consolidation among software vendors, analysts said.

If Oracle, the world's No. 2 software maker, were to press ahead by acquiring both merged companies, it would face higher regulatory hurdles as well as increased pressure on its profit margins, analysts cautioned.

"If PeopleSoft could get the J.D Edwards deal through, it does lower the odds of Oracle and PeopleSoft going through, principally because of the regulatory hurdles," said Paul Crisci, a managing director in the West Coast mergers and acquisitions office of Broadview International.

Oracle has admitted it was spurred into action by the June 2 announcement of the PeopleSoft-J.D Edwards merger, which threatens to knock it from second-place in the business planning software market behind Germany's SAP AG.

While recent momentum has swung in PeopleSoft's favor, analysts said Oracle could still raise its bid from the current $19.50 a share and convince shareholders to send PeopleSoft to the negotiating table. Oracle's tender offer expires on Monday if not extended.

Oracle co-founder and CEO Larry Ellison says the high-tech industry faces a consolidation wave similar to the one that took the number of car makers from the hundreds to a just a handful over the last century. He said a merger with PeopleSoft would help his company battle market giant SAP AG and new entrant Microsoft Corp., the world's biggest software company.

SHIFTING TIDE

Oracle's court challenge to PeopleSoft's poison pill takeover defense was indefinitely postponed this week after the Department of Justice asked for more information on its bid for its smaller rival. Both PeopleSoft and J.D. Edwards said that move could clear the way for their merger to proceed.

Oracle was dealt a second blow on Wednesday, when PeopleSoft said it would deliver better-than-expected quarterly revenues, countering fears that Oracle's hostile bid had frozen its sales and that the company might need a rescuer.

Oracle has expressed no interest in acquiring J.D. Edwards. "The current offer out there is for PeopleSoft only," Chuck Phillips, Oracle executive vice president told Reuters on June 20. "If PeopleSoft buys J.D. Edwards that would require a second merger agreement."

Analysts said it would be hard to make a good case for Oracle to also buy J.D. Edwards since much of its software runs on the AS400, an aging line of International Business Machines Corp. computers that Oracle does not support.

"Anybody who is on J.D. Edwards' AS400 software is really someone who likes being a dinosaur and is comfortable being a dinosaur," said Joshua Greenbaum, a principal at Enterprise Applications Consulting.

If Oracle were to pursue a combined PeopleSoft and J.D. Edwards, it might look to sell the AS400 customer base to a company such as SSA Global Technologies Inc., which has bought AS400 users from Computer Associates International Inc., AMR Research analyst Bruce Richardson said.

Sanford C. Bernstein analyst Charles Di Bona said acquiring J.D. Edwards could also put pressure on Oracle's margins. Oracle would also need to lower its $19.50-per-share offer if PeopleSoft buys J.D. Edwards, because PeopleSoft would issue new shares in the process.

"Oracle has three choices: Walk away, stir the pot for as long as they can, or they can end up buying it," Di Bona said.

© Reuters