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SAN FRANCISCO: The answer to that question cuts to the heart of Oracle Corp.'s $9.4-billion hostile takeover bid for rival PeopleSoft Inc. and the decision by the U.S. Justice Department to sue to block that deal on antitrust grounds.
As the closely watched lawsuit moves closer to trial on June 7 in federal court in San Francisco, both PeopleSoft and Germany's SAP AG have warned investors they face more pressure to cut prices on software for operations such as billing and payroll.
"It's a very competitive market ... it shows how this market is tough for vendors," said Merrill Lynch analyst Jason Maynard about the comments, made last week after the companies reported first-quarter earnings.
U.S. antitrust regulators, backed by 10 states, argue the enterprise software market has too few players to accommodate the Oracle merger. The market, including enterprise resource planning, customer relationship management and supply chain management software, is valued at around $30 billion.
But Oracle, and some Wall Street analysts, argues the government's view of the market is too narrow and discounts the competitive threat from both niche players and new entrants such as Microsoft Corp.
Recent comments from SAP and PeopleSoft on pricing pressure could back the position of Oracle, which dominates the market for database software but has struggled to gain share in the market for enterprise applications.
Charles Biggio, a former senior official at the Department of Justice's Antitrust Division, said it was hard to know what the companies meant by increased pricing pressures because they do not disclose details for competitive reasons.
Analysts also said it was unclear what impact the comments may have on the government's case, which carries the burden of showing how Oracle's takeover bid, would crimp competition.
But sensitive information, such as pricing strategy, is likely been made public when the trial begins.
SAP NOT IMMUNE
SAP Chief Executive Henning Kagermann told analysts his company was not immune from discounting due to pricing pressures.
PeopleSoft Chief Executive Craig Conway -- a former Oracle executive -- told Reuters the company was sweetening deals with added software and services rather than lowering prices. He emphasized he did not see the pricing pressure deepening.
PeopleSoft would not comment further on its pricing policy nor on what its comments may mean for the suit, spokesman Steve Swasey said.
Oracle, in response, said Chief Executive Larry Ellison noted after the company reported earnings in March that there was "tremendous price pressure basically in all quarters" of the business software market.
The government fears the takeover would lead to higher prices by leaving just two firms -- SAP, the No. 1 provider, and a merged Oracle/PeopleSoft -- offering human resource and financial management software to companies and governments.
European Union antitrust regulators have also issued a statement of objections to a merger of the two California-based companies, though a final ruling is not expected soon.
Analysts have said increased pricing pressures may stem from weaker demand for business software as increased technology spending goes more toward hardware and operating system software. Another component is niche software vendors who have had some recent success winning business from the dominant players, analysts said.
For example, the Department of Justice awarded a contract to American Management Systems Inc., a small maker of financial management software, rather than Oracle or PeopleSoft. The deal has a potential value of $24 million.
Michigan, a party to the federal suit over the Oracle bid, runs human resource management software from Lawson Software Inc., another small software company.
Kurt Weiss, a spokesman for the Michigan Department of Information Technology, said that despite this, the business software market still needed more competition.
The Justice Department is expected to draw on testimony from companies that say they fear being left with fewer choices and higher prices if Oracle's bid succeeds.
The next pretrial hearing is scheduled for May 21.
© Reuters