Competitive Intelligence

Oracle-PeopleSoft: Ellison Prevails

As I'd earlier opined would happen, Larry Ellison and Oracle prevailed, at long last, over PeopleSoft in their pursuit to acquire this most reluctant of prey.

Still, planning is the easy part - execution is where success or failure will be judged. Often criticized for weak integration, Oracle needs to pull demonstrate an executable roadmap that will show skeptical customers, pro and con, exactly what, when and how it will integrate the company and its products to reassure the primary asset being acquired - PeopleSoft's customers - that they're safe staying put. Despite the cultural challenges ahead, at least Wall Street remains optimistic:

"PeopleSoft as a standalone entity was probably not worth $20 per share," said John DiFucci, a managing director at Bear, Stearns & Co. Inc. in New York. The pumped-up price reflects Wall Street's faith in Oracle's ability to turn the merged outfit into a lean software machine that will operate with fewer costs and will drive home more revenue, he said.

"I think it's good for Oracle, and it's good for the industry," DiFucci said, because Oracle CEO Larry Ellison has been right all along in saying that the industry has been in need of consolidation.

"Frankly, I don't think we'll see a return to double-digit growth, at least not on a long-term basis, this year or next year," he said. "Assuming all that, and assuming a lot of software companies came about or proliferated during the [dot-com] bubble, you come to the conclusion that we have too many out there, and there has to be a rationalization of the industry."

The deal also sent Oracle stock up almost 10 percent, largely due to the market's love for certainty, according to Tom Burnett, president of New York-based Merger Insight, an affiliate of Wall Street Access. "The market loves getting rid of the uncertainty," he said. "It's a very good move for Oracle. The board distraction was beginning to take a big toll."

Oracle executives have forecast the deal as promising to be 8 cents accretive by next year—in other words, the merger will add 8 cents per share to the bottom line.

The raw translation of that promise means that many PeopleSoft employees will lose their jobs, as Oracle squeezes redundancies out of the merged companies. Donovan Gow, an analyst for American Technology Research, in Greenwich, Conn., predicted that more than a few thousand employees will be considered redundant, and that the bulk of the victims will come from PeopleSoft's ranks.

"There will be massive head-count reduction across the combined firms," he said. "I would presume the bulk will come from the PeopleSoft side."

Of course, many PeopleSoft personnel may jump ship rather than work for the company they have long regarded as a bitter enemy. "Oracle is considered a more aggressive, hard-hitting, less friendly type of corporate culture," Gow said.

"PeopleSoft has been viewed as a nicer place to work: more enjoyable, more camaraderie, more laid-back, less hard-hitting. That's why they brought over [former PeopleSoft CEO] Craig Conway from Oracle: to instill a little more competitiveness to PeopleSoft's environment."

Regardless of Conway's tenure, PeopleSoft still has a different culture that will entail a tough adjustment for of its employees, many of whom will likely leave.

But from a financial perspective, that will work in Oracle's favor, according to DiFucci. "The PeopleSoft culture will be destroyed here," he said. "The Oracle culture will dominate. … That kind of integration, [which is just about rationalizing the industry], is not as risky as a lot of acquisitions.

"You're just buying a customer base, which is reflected by the maintenance stream. … When you're integrating people, that's where the risk comes in: with integrating the culture."

The question of customer retention is the big risk in all this, but Ellison has an exceedingly good poker face:

Ellison's strategy envisions virtually all of PeopleSoft's customers remaining on board after the acquisition, giving Oracle the opportunity to sell them a variety of other software products while it collects a steady flow of revenue for maintaining and upgrading existing products. Oracle is so confident its strategy will pan out that it has already assured investors the PeopleSoft will boost the company's profit by about $400 million during the fiscal year ending in May 2006.

Yet some surprises seem inevitable. Because of the hostilities underlying the deal, Oracle did not get an insider's view of PeopleSoft until this past weekend when the takeover target finally opened its books for the first time.

"Oracle is coming in with an unusual amount of ignorance about something that just cost them $10.3 billion," said Joshua Greenbaum, a business software consultant who has followed Oracle and PeopleSoft for years.

University of Southern California corporate law professor Ehud Kamar agreed, describing the Oracle takeover as "a deal that looks particularly susceptible to integration difficulties."

To ease the transition, Oracle hopes to retain the brightest engineers among PeopleSoft's 11,500 employees. At the same time, though, Oracle plans to fire thousands of other workers to cut expenses -- a process that threatens to open even more emotional wounds among PeopleSoft workers who skewered Ellison and his lieutenants during the takeover saga.

Ellison already is trying to patch things up. After Oracle announced the deal had been cinched, Ellison sent an e-mail to PeopleSoft's employees to reassure them that they will be treated fairly under his reign.

"One of the biggest risks for Oracle is whether it will be able to retain enough of the right people," said Meta Group analyst David Yockelson.

Silicon Valley's soft labor market should help Oracle by giving alienated PeopleSoft engineers less incentive to leave. PeopleSoft's October firing of its former CEO Craig Conway -- a vitriolic critic of Oracle -- also might have helped cool the tensions during the past two months, Kamar said.

Still, keeping PeopleSoft customers happy might prove even more difficult for Oracle.

PeopleSoft's customers have a huge stake in how the deal progresses because they already have sunk millions of dollars into sophisticated software applications that run everything from their accounting to personnel departments.

"You are talking about big, complex software that's difficult to implement potentially becoming even bigger and more complex," said Michael Lodato, executive vice president for QAD Inc., a smaller software maker in Santa Barbara. "I don't think you will see any of the customers jump ship in the short term, but two or three years down the road they may start spending their money on something else."

Ellison seems to welcome the skepticism about a merger that many analysts predicted would never be consummated. "The conventional wisdom has been wrong consistently in analyzing this deal."

At least PeopleSoft's board managed to get a slightly sweeter deal; but it remains to be seen whether customer retention will make it all worthwhile:

The PeopleSoft takeover saga became a foregone conclusion over the weekend, when the prey finally caved. After all, PeopleSoft's arguments—antitrust regulators won't approve it, the price tag wasn't high enough, and we just don't like Oracle—fell away gradually. Especially when you raised the bid to $26.50 a share, from $24.

Now Oracle gets what it really wanted—PeopleSoft's 12,500 customers and the support and maintenance revenue they represent. But the fun is really just beginning. PeopleSoft customers are a wary bunch, and many are making alternative plans just to be safe. Among the customers you will need to win over:

- David Smith, chief executive officer of PSS World Medical, who installed J.D. Edwards enterprise planning software four years ago at the Jacksonville-based medical products distributor. Since PeopleSoft bought J.D. Edwards, service has improved, according to Smith; PeopleSoft was just more responsive. Now that Oracle has PeopleSoft in the loop, however, he doesn't want the software his company depends on to become an afterthought. "I'm afraid," Smith says.

Why the worry? Maybe it was the June 2003 press release from Oracle blasting PeopleSoft's J.D. Edwards acquisition as a tactic just to fend off Ellison & Co.

- Arnold Testa, chief information officer of the Electric Power Research Institute, a nonprofit center for public-interest energy and environmental research. His firm has standardized on PeopleSoft software, and Testa says an Oracle takeover could be a disaster. Why? He doesn't want another implementation to suck up time and costs, and he has IBM as his database provider. No matter how Testa slices the deal, it's likely to be more work for him.

- John Moon, chief information officer at pharmaceutical company Baxter International, whose company is both a PeopleSoft and J.D. Edwards customer. When asked about a potential Oracle takeover at SIMposium Chicago in September, Moon said he was formulating undisclosed plans to deal with the event.

- John Webster, PeopleSoft programs director at Dakota State University in Madison, S.D. "Had Larry Ellison made a different case, it might be different. But his first approach to [PeopleSoft] obviously scared me. And first impressions are what counts," Webster said at PeopleSoft Connect in September.

Oracle will have to win that foursome over, and thousands of other technology executives (read: Oracle customers-to-be) with the same concerns.

Rest assured, these executives are plotting their next move, pondering switches to rivals such as SAP and anxiously awaiting phone calls from their Oracle and PeopleSoft contacts. Maybe you can keep them happy initially, but you'll have to work hard to migrate them to Oracle applications and upgrade accordingly. Their technology road maps will be amended starting today to include escape hatches and possible jumps to other suppliers. Your job: Keep them happy or they'll leave.

You wouldn't want to waste $10.3 billion.

Predictably, SAP wasted no time in weighing in on the mediocre nature of competition in a post-PeopleSoft market:

"The era of uncertainty is far from over," said Bill Wohl, SAP's vice president for product marketing, in a telephone interview. He said plenty of questions still remain around how former JD Edwards customers will be supported, how the integration of the two companies will proceed and what the long-term plan will be. "All of those questions and uncertainties bode well for SAP, which looks increasingly like a safe harbor in a stormy sea. ... We're dealing with customer requirements, while the others are focusing on legal battles and now mergers and acquisitions."

SAP, based in Walldorf, Germany, is the biggest business applications player, accounting for 39 percent of the market, compared with 25 percent for PeopleSoft and Oracle together. During the 18 months since Oracle launched its PeopleSoft takeover bid, SAP's market share increased in all its key markets around the world, Wohl said—an increase analysts attribute to the Oracle-PeopleSoft turmoil. In a research note earlier this year Gartner warned that enterprises in the midst of implementing packaged applications face additional risks when their vendors are acquired.

The turmoil will continue for at least another 12 to 18 months while the two companies complete the merger process, Wohl predicted. "You can't minimize the amount of work here to bring the two together. We believe this is a market opportunity for us—it's been that way all along, and it continues today," he said.

He said that even once they complete their integration, Oracle and PeopleSoft will only be "a modest competitor."

According to its president, Oracle has a clear idea of how it's going to slice up PeopleSoft to retain the choicest assets and send the rest to the corporate rendering yard. Click here to read more.

Ex-PeopleSoft CEO Craig Conway once likened the process of adopting SAP software to "pouring concrete," but sales increases are the best answer to such criticisms, Wohl said. "At the small and midsized business level, where flexibility and openness are most required, as well as at the enterprise level, SAP has solutions that are meeting those requirements," he said. "Customers are speaking with their wallets."

Philip Carnelley, research director with U.K. analyst firm Ovum Ltd., agreed that it will be some time before the merger results in a serious competitor to SAP, but he said the combined company should ultimately increase competition. "A stronger, equivalent competitor to SAP... will also be good for the industry and future buyers. SAP really was having things all its own way," Carnelley wrote in a research note.

He said the deal should mean some certainty for PeopleSoft customers. "At least now they'll get some certainty, even if they don't like the outcome, which now seems rather better than they feared," he wrote. IBM, one of PeopleSoft's closest partners and the customer for its largest-ever installation, will be one of the biggest losers from the deal, Carnelley wrote.

Microsoft Corp., which once considered acquiring SAP, said it "remained neutral" toward Oracle-PeopleSoft as it has done throughout the process. The software giant said it remains focused on its existing business applications strategy for small and midsize businesses. "Microsoft has no position concerning today's Oracle announcement," the company said in a statement.

Meanwhile, Microsoft has begun its onslaught to try and capitalize on all that FUD:

Just two days after Oracle signed an agreement to buy PeopleSoft Inc., Microsoft issued its first formal overture to PeopleSoft's customers.

Microsoft corporate VP Bill Veghte on Wednesday sent a letter to PeopleSoft users urging them to migrate their Unix-, AS/400-, and mainframe-based PeopleSoft applications to Windows servers. For companies already running PeopleSoft applications on Windows, Veghte pitched increased investment in a broader range of Microsoft technologies, including its .Net Web services, portal software, and analytics tools.

"Extending your current PeopleSoft investment positions you for the future on the Microsoft platform," he wrote.

Microsoft also is encouraging PeopleSoft customers to consider shifting to the enterprise-resource-planning applications sold by its own Microsoft Business Solutions division or those of a partner.

"Migration to another ERP solution, including Microsoft Business Solutions, SAP and other partner ERP solutions on the Microsoft platform are additional options to PeopleSoft customers seeking greater clarity around technology direction and platform choice," Veghte wrote.

That last pitch is a shot across the bow of Oracle, which is spending $10.3 billion to acquire PeopleSoft largely to gain its customer base. Microsoft officials have repeatedly said they don't intend to compete at the high end of the ERP market, but there are many small and midsize accounts where Microsoft Business Solutions could bid against a combined Oracle-PeopleSoft. Microsoft Business Solutions sells four ERP suites, acquired for more than $2 billion over the past three years.

And, it's managed to push middleware vendors into a tighter spot - perhaps sowing the seeds of a broad alliance between the two other giants of the business - IBM and SAP:

Oracle's successful bid for PeopleSoft is going to change the face of the enterprise-applications market. It will blur the edges between middleware offerings and applications and force middleware vendors to compete or get pushed into a corner, says Yankee Group analyst Michael Dominy. Middleware suppliers such as BEA Systems, Tibco Software, and webMethods, as well as younger companies such as Blue Titan Software and Sonic Software, "are in danger of being left behind" by the combined impact that an applications and database vendor can have on the middleware space, he says.

One of the middleware's primary roles is to connect applications to database resources. Oracle is about to convert its ability to manage that connection seamlessly into a competitive advantage. And it will be developing that capability for an applications customer base second only to SAP itself.

One possible outcome will be greater cooperation between IBM and SAP, Dominy says. The two companies are longstanding partners on several fronts, and SAP has made its pioneering NetWeaver middleware and application-integration tools interoperable with IBM's WebSphere middleware.

IBM for several years has competed with Oracle by telling third-party application vendors that it won't compete with them on the applications front the way Oracle is willing to. IBM is unlikely at this late date to make a foray into the applications market because that would require it to either buy or build its own product set, observers note.

"IBM has done an amazing job of building professional services," says Niel Robertson, CTO of Newmerix Corp., a supplier of management software for PeopleSoft applications. Part of its IBM Global Services expertise is in moving enterprises onto ERP systems. Now it will lose part of that business as PeopleSoft, with whom IBM was a partner, disappears inside the Oracle fold, Robertson says. Nevertheless, IBM, more than Oracle, "has become master of the middleware infrastructure" with WebSphere, its Tivoli management system, and Rational Software development tools.

PeopleSoft will add to Oracle's strengths in certain areas. It has development, marketing, and sales expertise in human-resource, customer-relationship-management, and supplier management applications--the core of its applications business. It's also adept at selling to state governments, an area where Oracle has sometimes shown a tendency to stumble. For example, Oracle got into a brouhaha with California in 2002 when state officials charged Oracle with over-selling the expected benefits of a $95 million software contract with the state government. That contract was canceled.

"Oracle needs to be sure and retain the people with expertise in those markets," Dominy says. But he added that it's not yet clear that it will know how to do so. Efforts to retain PeopleSoft employees and the company's customer base may have been hurt by Oracle executives' comments about its plans for PeopleSoft in the early days of the takeover attempt, Dominy notes. Now a lot of key personnel inside PeopleSoft may or may not know what the future holds for them. Given that Oracle's efforts to buy out PeopleSoft took 18 months, Dominy says, "you would think Oracle would be ready to flesh out more details of the takeover at this point."

One this is for sure - if Oracle can execute as well as they plan (overlooking SAP's broader opinion that this was a dumb idea from the start) to stem what could be a tidal wave of customers from running to the waiting arms of the competition, the economies of scale the deal provides Oracle are impressive.

In the words of Ellison himself: "This merger gives Oracle even more scale and momentum [in its applications business]... This merger is going to make that applications business bigger and stronger... This merger works because we will have more customers, which increases our ability to invest more in applications development and support."

- Arik

Posted by Arik Johnson at December 14, 2004 05:02 PM | TrackBack