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Case Study

Oracle versus PeopleSoft Barbarians in the Valley

FANS of the raw-meat variety of capitalism are finding much to admire in Oracle’s hostile bid for PeopleSoft, a big rival in the software business. There is the theatre: two sworn enemies slugging each other senseless. But there are also the growing signs that Oracle’s bid may come to mark a departure from the previous rules of business in America. The business culture of the 1990s—defined, above all, by the consensual business matings that spawned the greatest merger boom in history—now looks too cozy. As agitation for system-wide reform continues, Oracle’s bid is the latest evidence that managers, boards, and shareholders have begun to play a less friendly game. Nobody knows what the new rules will look like. This battle may provide the first real clues. On June 2nd, PeopleSoft said that it would buy J.D. Edwards, a smaller rival. Four days later, Oracle announced its own bid for PeopleSoft and invited the firm’s board to talk. Furious that his own plans had been endangered, PeopleSoft’s boss, Craig Conway, called Oracle’s offer “diabolical”, and its boss, Larry Ellison, a “sociopath”—not the worst thing ever said of the colorful billionaire also famed for his love of things Japanese and trying to win America’s Cup for yachting. Moreover, said Mr. Conway, he “could imagine no price nor combination of price and other conditions to recommend accepting the offer”. On June 12th, PeopleSoft turned Oracle down. It said there was a big risk that antitrust authorities would block the merger; that uncertainty, plus Oracle’s stated intention to discontinue PeopleSoft’s products, would damage the company; and that Mr. Ellison’s $16 a share offer was too low.Mr Conway’s comments were a gift, allowing Oracle to claim that PeopleSoft’s management was entrenched and deaf to the interests of its shareholders. On June 16th, PeopleSoft amended its bid for J.D. Edwards in a way that allowed it to avoid putting the matter to a vote of PeopleSoft shareholders—claiming it did so to accelerate the merger and limit the harm from Oracle’s bid. Oracle said PeopleSoft was once again frustrating the will of shareholders. Larry’s Art of WarOn June 18th, Mr Ellison raised his bid to $19.50—and also filed suit against PeopleSoft, alleging that the board’s actions, including its refusal to dissolve the firm’s strong “poison pill” anti-takeover defence, breached its fiduciary duties to shareholders. Two days later, this time after “careful consideration and acting upon the recommendation of a committee of independent directors”, PeopleSoft’s board again rejected Oracle’s offer, for the same three reasons as before. Oracle says PeopleSoft’s board has never made contact.

The first item before PeopleSoft’s shareholders is the sincerity of its antitrust defense. Mr. Ellison says that PeopleSoft’s arguments are specious. Business software is a highly competitive market, he says, with the biggest firm, SAP of Germany, enjoying just a 17% share. Moreover, he asks, why would the authorities allow PeopleSoft and J.D. Edwards, the third- and fourth-biggest firms, to merge, but not Oracle and PeopleSoft, the second-and third-biggest? PeopleSoft responds that Mr. Ellison is defining the market too loosely. In the market for software sold to large firms, it says, there are only three suppliers: SAP, Oracle, and itself. In announcing his bid, Mr. Ellison said that, although he would continue to support PeopleSoft’s existing software, Oracle would no longer develop future versions. That has given PeopleSoft a lot of angry customers to marshal in its defense. As one source close to PeopleSoft puts it, “software is like fish: if it stops swimming, it dies”. Eventually, customers know they will have to switch to different software, which will cost money. By itself, this does not violate antitrust law (although the state of Connecticut, which is suing to block the merger, appears to think differently). But it does create a strong motive for customers to oppose the merger. With the Department of Justice likely soon to announce it needs more time to study the deal (a routine request, says Oracle), Mr. Ellison says he is willing to be “very patient, for as long as it takes”. If that is true, the focus is likely soon to turn to PeopleSoft’s anti-takeover defenses, notably its poison pill and its staggered board. Poison pills, which use the threat of a massive issuance of new shares and other complicated tactics to thwart takeovers, spread as managers sought protection from the sort of hostile takeover popular in the 1980s. Of the 5,529 publicly owned firms that Institutional Shareholder Services monitors, 2,024 have a poison pill. Staggered boards (in which directors, serving multi-year terms, get elected in different years, making it impossible to replace an entire board at once) are even more popular: 3,052 of ISS’s firms have a staggered board. It would take two annual meetings to elect a majority of PeopleSoft’s board. The respectable defense for these practices, sanctioned by the courts, is that they stop a “rush to judgment” during a hostile bid, an argument PeopleSoft now echoes. The counter-argument is that they entrench management, discourage takeover attempts, and depress the share price. Shareholders are becoming more suspicious of poison pills. Recent shareholder pressure on Hewlett-Packard, another west-coast technology firm, forced its board to dissolve its poison pill. A shareholder resolution asking that the firm put the creation of future pills to a shareholder vote passed this year, despite management opposition. The way PeopleSoft handles its defenses could crystallize attitudes.

Ultimately, the courts in Delaware (where most American firms are incorporated) may be asked to rule on the board’s behavior at PeopleSoft. This would also be an important test of changing attitudes. Recent Delaware rulings (including sharp words for Disney’s board over an obscene pay-off to Michael Ovitz, a failed former company president) suggest that its judges have begun to rethink the latitude with which they have allowed directors to exercise their “business judgment”. Delaware has a bad name, as a haven for incumbent management. But of late, say its supporters, its judges have become more sensitive to the wishes of big shareholders, and they will be listening attentively. Mr. Ellison may have to raise his offer if he wants to convince the world that PeopleSoft’s management really is entrenched and calls the shots over what one Oracle adviser calls a “typical, light-weight Silicon Valley board”. Shareholders, meanwhile, will have to decide whether they need to push harder for more power. Next month, the Securities and Exchange Commission will decide whether to propose new rules giving shareholders the right to nominate candidates for directors themselves. Some institutional investors champion the idea. Most managers hate it. The SEC is also thinking of giving shareholders an annual vote on the boss’s pay. That may be something to which Mr Ellison, America’s unlikely new shareholder champion, needs to devote some thought. In 2001, including share options, Oracle’s famously imperial boss collected over $700m.