Hostile Takeovers, Hostile Resistance, and Customer ... - SAP.com

Hostile Takeovers, Hostile Resistance, and Customer Choice: An Impact Analysis of the PeopleSoft Takeover by Oracle Corp.

Joshua Greenbaum, Principal Enterprise Applications Consulting Spring, 2005

EAC 2 3 0 3 Sp a u l d i n g Av e n u e Berkeley CA 94703 tel 510.540.8655 fax 510.540.7354 josh @ eaconsult.com www.eaconsult.com

Table of Contents

Introduction: Software M&A and the Untold Impact of Hostile Resistance................................ Page 1 M&A in the Software Industry: A History of Mixed Results......................................................... Page 2 Prolonged Hostile Resistance and Merger Trouble .................................................................... Page 3 Prolonged Hostile Resistance and the Impact on Customer Choice: Oracle vs. PeopleSoft .................................................................................................................. Page 4 The Bottom Line for Customers: Points of Vulnerability for the New Oracle ............................. Page 8 Conclusion: Hostile Mergers and Long-Term Customer Continuity ........................................ Page 15 Appendix 1: Oracle/PeopleSoft Timeline Highlights .................................................................Page 17

Hostile Takeovers, Hostile Resistance and Customer Choice

Introduction: Software M&A and the Untold Impact of Hostile Resistance The history of the software industry is one of an exceptional level of merger and acquisitions activity, representative of the dynamism of one of the most vibrant industry sectors in the global economy. While M&A activity in the software industry – which exceeded 1400 transactions in the last four years (see Figure 1: U.S. Sector-specific M&A Activity) – is overwhelmingly friendly, it is nonetheless fraught with problems. Many mergers that initially look to be successful eventually fail to deliver value to shareholder, and perhaps more importantly, continuity and innovation to customers.

The incidence of hostile takeovers, by contrast, is extremely small, so small as to be a statistical anomaly in a market that overwhelmingly prefers its takeovers to be friendly, if not mutually beneficial. With even friendly acquisitions problematic at times, it stands to reason that hostile takeovers have an added element of risk. The recent acquisition of PeopleSoft Inc. by Oracle Corp. after an exceptionally hostile and prolonged 18-month period provides an important opportunity to reassess the value and role of hostile takeovers in the software industry and define these additional risk factors. This reassessment shows that the mixed record of software M&A is rendered even more problematic by a hostile takeover and prolonged hostile resistance such as took place in the PeopleSoft acquisition by Oracle. The additional impact can be felt in the problems that Oracle has had in planning for a smooth and customer-friendly merger, particularly with respect to technical, licensing, management, financial, and relationship-related issues.

Enterprise Applications Consulting believes that while some of the issues can be dealt with now that Oracle is in possession of PeopleSoft, many of the problems associated with this merger are endemic to the nature of the hostile takeover and prolonged period of hostile resistance, and represent a series of barriers to success that may fuel the desire of existing PeopleSoft customers to migrate their systems to other vendors. Other issues, related to the relatively weak competitive positions of both Oracle and PeopleSoft at the close of the merger, also represent potential barriers to success. One major result is that EAC expects PeopleSoft customers to accelerate their plans for platform change away from PeopleSoft applications and architecture, despite Oracle’s assurances that those products will be supported until 2013. That acceleration, EAC believes, may

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in turn be cause for additional defections of PeopleSoft customers to alternative vendors, defections that will further complicate a favorable outcome to the merger process.

Figure 1: U.S. Sector-Specific M&A Activity

M&A in the Software Industry: A History of Mixed Results While the ultimate success or failure of most of the thousands of acquisitions in the software industry is largely unknown, enough of the larger acquisitions involving publicly-held companies have foundered to make guarantees of M&A success difficult to predict or count on. The most recent set of questionable deals are Microsoft’s acquisition of Great Plains and Navision, which have been significantly unprofitable and have failed to meet Microsoft’s revenue and market dominance goals. The now-defunct Baan Corp.’s acquisition of Aurum and Nortel’s acquisition of Clarify are other examples of failed mergers. Baan’s subsequent acquisition by Invensys also yielded extremely poor results and an eventual sale. Further back in history, a series of acquisitions in the 1980s and 1990s by Sybase, Informix, ASK and others were also spectacular failures.

There have been notable successes as well. IBM’s Lotus, Tivoli, and Rational acquisitions are largely judged successful, though the company failed in some significant enterprise applications acquisitions prior to its decision to exit that part of the market. And Oracle has touted its acquisition of the Rdb database from Digital Equipment Corp. as a successful acquisition, at least from a customer standpoint. Oracle’s track record is also mixed, however: Its 1996 acquisition of Datalogix, a process manufacturing company, was singularly problematic for Oracle and Datalogix’ GEMMS customers.

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The reasons for failure, even in these friendly deals, revolve around a consistent set of problems. Cultural mismatches are probably the most common problems, and have played a significant role in the problems that Microsoft has had with its two large enterprise software acquisitions, as well as the ill-fated Nortel acquisition of Clarify and IBM’s earlier forays into enterprise applications. Poor due diligence and financial miscues are another common set of problems, both of which plagued the Baan acquisition of Aurum and Invensys’ acquisition of Baan. Technical integration is also a major problem, one that beset Baan’s Aurum acquisition as well as Oracle’s acquisition of Datalogix. In sum, the track record for friendly mergers in the software industry is decidedly mixed, and the main problems – culture, lack of due diligence, financial problems, and poor technical integration – militate against even the best of intentions. As we shall see, when the worst of intentions are put in play, the already questionable potential for a successful software merger drops significantly.

Prolonged Hostile Resistance and Merger Trouble Any acquisition in the software industry raises concerns about customer and employee defections, as well as the ability of the acquiring company to effectively support its new customers. The additional impact of a hostile acquisition on standard M&A success factors relating to management, product direction, industry direction, and other key issues also weigh heavily on overall success. As undesirable as a hostile takeover may seem, however, EAC research shows that a far greater negative impact can be seen in the results of prolonged hostile resistance to a hostile takeover attempt, such as took place in the PeopleSoft acquisition by Oracle. This is particularly true with respect to customers of both the acquired and the acquiring company. This impact can outlast the cessation of hostilities, and severely limit the ability of a company like Oracle, regardless of its intentions, to meet the needs of its new customers while managing a smooth transition to new products, new personnel, and new support, service, and licensing regimes.

While executives of PeopleSoft had a fiduciary responsibility to resist the hostile takeover of Oracle with regard to price, feasibility, and impact on customers, EAC believes that this responsibility was exceeded by the actions of PeopleSoft management in a way that greatly exacerbated any possible negative impacts and did more to call into question the long-term feasibility of the acquisition than the actions of Oracle in its initial acquisition attempt. It should

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be noted that PeopleSoft management ultimately fulfilled their fiduciary responsibility to their shareholders by exacting a price more than double Oracle’s initial bid, but the impact on Oracle’s ability to successfully manage the transition was potentially severe. This in turn greatly increased the risk to existing PeopleSoft customers’ investment, and, in the aftermath of the acquisition, the risk continues.

While there were many individual tactics employed by PeopleSoft in its hostile resistance, the factor that may have had the greatest impact on Oracle’s success was time: 18 months of hostile resistance by PeopleSoft exacerbated an atmosphere of ill will, confusion, and customer anxiety that will significantly – and in EAC’s opinion unnecessarily – impact the achievement of Oracle’s ultimate goal for the acquisition: customer retention and profitability for the acquisition. (See Timeline, Appendix 1.) While Oracle is clearly determined in the aftermath of the takeover to hold on to its new PeopleSoft customers, EAC believes there may be significantly more defections as a direct result of PeopleSoft’s hostile resistance than Oracle is counting on. EAC believes this should largely favor SAP, a further unintended effect of PeopleSoft’s hostile resistance. At a minimum, the factors that would have made any merger of Oracle and PeopleSoft difficult to achieve – from technical and product incompatibilities to competitiveness and personnel issues – were made significantly more problematic by the prolongation of hostilities.

Prolonged Hostile Resistance and the Impact on Customer Choice: Oracle vs. PeopleSoft The ability of prolonged hostile resistance to exacerbate the problems of merger and acquisition in software companies revolves around four key issues that can complicate the process and will likely contribute to the difficulties in meeting Oracle’s goals for the acquisition and the needs of the PeopleSoft customer base.

Hostile Takeovers Mean No Due Diligence One of the hidden problems with hostile takeovers is the inability of the acquiring company to do any due diligence on the acquired company’s technology, human capital, and financial assets. This was very much the case in Oracle vs. PeopleSoft, and resulted in a significant lack of planning ability on the part of Oracle. This problem was mentioned in Larry Ellison’s testimony during the Department of Justice vs. Oracle case in the spring of 2004, and confirmed by Oracle

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co-president Safra Catz at the Oracle World Conference that took place just prior to the merger announcement in December, 2004. Ellison in particular confirmed that, even a year after the announced acquisition, there was no specific documented plan for any of the merger, other than the more general plans around financing. This is of course due in no part to inattention on the part of Oracle, but rather due to the inability of anyone at Oracle to know the specifics of PeopleSoft’s assets in order to put together such a planning document.

While this problem is standard in hostile takeovers, the hostile resistance effect greatly exacerbates the problem and the risk to both the acquiring company, and indirectly, the acquired customers. The dynamism of the software industry is such that 18 months represents an extraordinarily long timeframe to be without a definitive plan. That timeframe looks even riskier considering the increased cost to Oracle to complete the deal – the final acquisition price was double the initial asking price, not to mention management and legal costs – and the license revenue stagnation that beset PeopleSoft as those 18 months dragged on.

This lack of up-front due diligence and the 18-month lag between initial bid and final offer mean that PeopleSoft customers, who have a significant stake in knowing what the future may hold for them under Oracle’s stewardship, were left without any reliable guidepost other than the shifting prognostications of Oracle’s management. (Oracle executive opinion on the fate of PeopleSoft 9, for example, changed drastically from the time of the initial bid to the final conclusion in Dec., 2004. Initially, Oracle indicated it would discontinue development of PeopleSoft products, an opinion that remained largely unrefuted until late in 2004.)

EAC believes that this degree of prolonged uncertainty was damaging not just during the 18month waiting period, but continues to be damaging in the follow-up to the completed merger. Customers looking for hard facts to back up the assurances of Oracle management now have to wait for due diligence to occur and the planning phase to begin. Even following Oracle’s first public event in mid-January to discuss plans for the newly merged entity, specific product plans and migration options are still not forthcoming. This in turn further complicates customer efforts to plan their technology and software acquisitions based on the combined company’s future offerings. It is therefore understandable that some customers, whose planning processes regarding PeopleSoft were put on hold at the initiation of the hostile takeover in mid-2003, have questioned the feasibility of continued waiting and have begun looking at migrating to alternative vendors

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that can present comprehensive plans that fit into customers’ planning windows. This is another scorched earth result of PeopleSoft’s hostile resistance that may in the end benefit SAP.

Hostilities Lead to a Lack of Focus One of the more intangible but nonetheless important issues is the impact of extended hostilities on management focus, with respect to both Oracle’s and PeopleSoft’s applications business. Prior to the initiation of the hostile takeover in June 2003, Oracle’s applications business was already losing momentum not only in the industry but, more importantly, in the mindshare of Oracle’s senior executive team. This effect, which began with the departure of Oracle CEO Ray Lane in 2000, and continued with the departure of chief marketing officer Mark Jarvis in 2003, rendered Oracle’s applications business the poor stepsister of the company’s much larger technology and database lines of business. Applications marketing went through a number of executive changes following Jarvis’ departure, and was without the clout it once had at the start of the PeopleSoft bid.

Ironically, there was a similar lack of focus on the future at PeopleSoft in the run-up to June, 2003. The company’s attempts at market leadership prior to Oracle’s bid were limited to its illfated Total Ownership Experience initiative – which sought and failed to prove that PeopleSoft could deliver a lower total cost of ownership in any comparatively measurable way – and its J.D. Edwards acquisition. Notably, in 2002 and 2003 PeopleSoft was standing on the sidelines with regard to such industry initiatives as service oriented architectures, composite applications, standards-based development environments, and the overall shift to a combined infrastructure and applications offering, not to mention on-demand computing and other issues.

The result of the hostile resistance of PeopleSoft meant that these two defocused companies spent 18 months fighting not the good fight about technology direction and applications excellence but a down-and-dirty legal and public relations battle. The diversion of executive talent was extraordinary. The transcript of Larry Ellison’s pre-trial deposition in the Department of Justice case runs to over 300 pages, Chairman Jeff Henley’s testimony is 61 pages long, head of sales Keith Block’s testimony is 120 pages long. And this is just for one of a half dozen trials that took place or were to take place over the course of the 18 months. PeopleSoft executives also spent an enormous amount of time in deposition, testimony, and other legal wrangling.

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The result of this defocusing effect can be seen in the relative contrast of Oracle/PeopleSoft’s perceived market position and leadership vis-à-vis SAP. SAP has been able to capitalize on the gap in leadership offered by the diversion of PeopleSoft and Oracle executives to focus on a number of initiatives, such as the NetWeaver services architecture and its “applistructure” strategy, and has set the pace for revenues and profitability in the enterprise applications space. Furthermore, published reports see SAP as not only the overall market leader by eight percentage points, but also credit SAP America with gaining 22 percentage points of market share during the previous two years. Oracle by contrast has as its main strategy for the foreseeable future a major due diligence, product planning, and customer consolidation task that is likely to continue to divert its efforts from meeting SAP’s challenge for some time.

This prevailing problem of general market leadership – leadership in innovation, technology, and market share – is a serious concern for many customers that view enterprise software as a major means by which they can establish competitive advantage in their industries and more closely align with customers and partners. Many companies are driven by their internal market dynamics as well as external regulatory and other factors to continually innovate their business processes and, by extension, their technology and applications infrastructure. A lack of market leadership on the part of a major software vendor translates into an inability to meet the changing business dynamics required by that vendor’s customers – an inability that frequently results in customer defections. No matter how strong customer loyalty and satisfaction may be, any vendor that cannot offer the fruits of market leadership to its customers risks losing those customers to a vendor that can.

Hostilities Lead to Personalization, Prolongation, and Excessive Use of Poison Pills Hostile takeover attempts are often spectacularly unfriendly, but the caliber of the rhetoric in the Oracle/PeopleSoft fight was exceptional by many standards. The rhetoric on both sides – PeopleSoft CEO Craig Conway initially labeled the deal “atrocious”, and Larry Ellison later made some glib remarks about shooting Conway’s dog – was part of a personalization of the conflict that helped prolong the takeover and prevent a timely resolution.

EAC believes that PeopleSoft’s position that a sale was not possible at any price was probably the single most salient factor in the war of words between the two parties. While Oracle initially failed to reassure PeopleSoft customers that it would continue to support them – a major tactical mistake – PeopleSoft’s subsequent activities did more to prolong the deal than resolve it. The

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various lawsuits, the Department of Justice suit, the Customer Assistance Program that would have forced severe penalties on Oracle for de-supporting PeopleSoft products, and other activities, were all part of a plan to prolong hostilities.

PeopleSoft’s poison pill defense was also used as a prolongation tactic. The fact that 18 months after the initiation of hostilities, the poison pill defense was the only real defense left standing, speaks to the abusive nature of prolonged hostile resistance. Poison pills are intended to give boards of directors time to find a white knight or other alternative to the hostile takeover, not as the last line of defense in an 18-month takeover struggle. Again, the personalization of hostilities led to these desperate measures, to the detriment of both parties and their customers.

Prolonged Hostilities Lead to Undue Financial Pressures Oracle initiated this deal to gain up-sell/cross-sell revenue based on a projected doubling of Oracle’s customer base. The prolonged hostilities took the original bid of $5.1 billion and more than doubled it, even in the face of a decline in PeopleSoft’s revenues, market position, and overall prospects. Those prospects, exacerbated by the factors outlined above, lead EAC to question how readily Oracle can make good on its investment and what price PeopleSoft customers will have to pay. Clearly the pressure will be on PeopleSoft customers to provide the up-sell/cross-sell revenue needed to justify the final price, and, judging by the impact of the above factors, that pressure will be greater than had Oracle and PeopleSoft been able to come to an agreement sooner. (See PeopleSoft Customers and the Up-sell Burden, below.)

The Bottom Line for Customers: Points of Vulnerability for the New Oracle The problems brought on by Oracle’s hostile acquisition of PeopleSoft, greatly exacerbated by PeopleSoft’s prolonged hostile resistance, reveal eight specific points of vulnerability for Oracle as it seeks to both retain and up-sell its new customers. While there are none that by themselves necessarily represent the rationale for a definitive break between Oracle and a former PeopleSoft customer, taken together, these points of vulnerability highlight the decisions that customers will have to face and the problems that Oracle will have to cope with as it seeks to retain its new customer base.

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Overall, EAC believes that the problems PeopleSoft customers face with regard to product futures, license, maintenance, personnel and other issues will bring the question of a wholesale product migration – either to Oracle 11i or to a competing vendor product – to the fore much sooner than is currently believed. This imperative to make a decision potentially much sooner than anyone – including Oracle – may have originally believed could tend to favor non-Oracle choices, particularly considering the ongoing uncertainty and problems associated with the aftermath of PeopleSoft’s prolonged hostile resistance.

Technology Platform Issues and the Migration Imperative Oracle has made it clear that it plans to support the existing technology base of its PeopleSoft customers, and will have to lean heavily on the technical staff of PeopleSoft as it acquires customers using platforms that Oracle doesn’t support, such as IBM WebSphere, DB2, the iSeries platform, BEA and Microsoft’s infrastructure technology. Regardless, Oracle’s plans for this technology may not be strong enough to allow those customers with long-term strategic commitments to continue those plans with much confidence.

The technology platform support issue and its relationship to long-term planning for PeopleSoft customers can be broken down into two issues: how will Oracle support existing IBM, BEA, and Microsoft platform customers today, and what will Oracle do about support in the future? With regard to IBM, Oracle has made specific promises to support DB2 and the iSeries platform, and WebSphere as well. The overall support for non-Oracle technology will be in the form of maintenance support for existing implementations: EAC does not expect Oracle to support new development initiatives on the part of PeopleSoft customers based on non-Oracle technology, and expects instead that there will be active encouragement of migration to an all-Oracle platform.

The result is that, Oracle support notwithstanding, PeopleSoft customers that have not currently based their implementations on the Oracle database and applications server will need to consider making an important platform shift in the near term as a direct result of the acquisition, assuming they want to remain Oracle customers. While Oracle is encouraging these customers to at a minimum stay where they are and pay their maintenance fees to Oracle, the “dead-end” nature of non-Oracle technology in the PeopleSoft customer base would make it imperative that these customers either initiate a near-term migration process or reconcile the PeopleSoft implementations to this “dead-end” status.

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Oracle’s statements to date leave these customers – some 40 percent of the PeopleSoft customer base, according to most estimates – with the option to replace their non-Oracle infrastructure with Oracle infrastructure technology, and/or sunset their non-Oracle development plans with respect to their enterprise applications environment. These shifts will be potentially costly and disruptive to PeopleSoft customers, particularly as PeopleTools or Microsoft skills won’t necessarily transfer to Oracle’s Java-based world. Similarly, a strong emphasis on WebSphere or Microsoft’s .NET at existing PeopleSoft customers will need to be at least reconsidered – if not curtailed altogether – if those installations are to embrace an Oracle-directed technology future. Finally, those customers with DB2 or SQL Server database skills will have to acquire Oracle DBMS skills in order to manage the transition to an Oracle technology base. The bottom line is that a major platform migration is in store one way or another for PeopleSoft customers that are not currently Oracle technology customers.

Technical Integration of Product Lines and the Upgrade Problem A similar issue exists with respect to the proposed “integration” of Oracle’s three product lines – PeopleSoft, J.D. Edwards, and Oracle 11i. Oracle has made it clear that no attempt at technical integration will take place. Rather, Oracle will incorporate the best features from PeopleSoft (and, possibly, J.D. Edwards) and blend those into a new, Java-based Oracle 12, code-named Project Fusion.

These present significant upgrade issues for PeopleSoft customers, assuming that Oracle 12 comes out in 2008, as recently promised by Oracle. That three-year timeframe may conflict with Oracle’s plans to also go through with the planned upgrade from PeopleSoft 8 to PeopleSoft 9 in 2006. Assuming Oracle can make that aggressive a deadline for an upgrade – that Oracle admits has little in the way of specific product definition – the availability of PeopleSoft 9 would come tantalizingly close to the release of Oracle 12, complicating customers’ buying decisions and potentially leading to a deferral of a PeopleSoft 9 buying decision in favor of waiting for Oracle 12.

Assuming that customers have a choice between PeopleSoft 9 and Oracle 12, the choice is still not a simple one. An upgrade from PeopleSoft 8 to Oracle 12 would represent a significant platform and technology upgrade for many PeopleSoft customers, entailing not just a change on the applications side but a similarly significant change on the database and applications server side. Even PeopleSoft customers that are running on some version of the Oracle database will

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likely need to change not just their database version but also migrate from WebSphere and Tuxedo to the Oracle iAS applications server. While Oracle promises to facilitate such an upgrade, and provide significant price breaks to PeopleSoft customers, the bottom line is that a PeopleSoft 8 to Oracle 12 upgrade would be a major undertaking, and would more resemble a full-blown implementation than a mere upgrade.

Meanwhile, a PeopleSoft 9 upgrade would be an upgrade to a dead-end product, one that Oracle has made clear will have no successor based on the current PeopleSoft technology platform. This makes an upgrade to PeopleSoft 9 for the non-Oracle technology customer nothing more than a deferral of the decision to change platforms. Even for customers that are only buying pieces of new functionality, this technological dead-end will likely push them away from the PeopleSoft platform relatively rapidly.

In light of the proximity of a potential PeopleSoft 9 release to Oracle 12, and the issue of PeopleSoft’s dead-end status, EAC believes that Oracle has left PeopleSoft customers with few long-range options: initiate a migration to Oracle 11i, wait an indeterminable amount of time for Oracle 12, or initiate a migration to another vendor. While Oracle is determined to support PeopleSoft 8 customers until 2013, those customers with the need for advanced functionality and technology will need to make a choice – or at least begin planning for a choice – relatively soon.

Disruptions to Innovation, Product Futures, and Market Leadership The question of innovation and product futures remains a major issue for PeopleSoft customers. Oracle is unlikely to be able to sell any Oracle applications product as a functional up-sell to a PeopleSoft customer, due to the incompatibility between the two product lines and the lack of modularity in the Oracle 11i E-business Suite. As of Oracle’s merger plan announcement in midJanuary, the lack of due diligence and the assumptions about technological incompatibility made it impossible for Oracle to specify any Oracle applications functionality that could be sold to a PeopleSoft customer that was not already an Oracle applications customer. With PeopleSoft 9 out in the future, and its ultimate status uncertain despite Oracle’s promises to bring out the product, sources of innovation and product futures are problematic issues for PeopleSoft customers trying to plan their IT future.

Of course, these customers are free to purchase additional functionality – and seats – from Oracle based on the PeopleSoft product line. For many, this may be sufficient, though EAC believes that

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the lack of focus and market leadership at PeopleSoft in the years prior to the merger have made innovation options relatively scarce for PeopleSoft customers, particularly relative to what is available in the market from competing vendors, such as SAP and a host of third-party ISVs.

Additionally, while EAC expects Oracle to try to reassert its overall market leadership position in 2005 as it moves forward with the merger, this will be difficult to execute alongside the merger activity that must necessarily take precedence. For now, the newly constituted Oracle has to overcome obstacles relating to both its lack of market and innovation leadership prior to the merger, and the fact that PeopleSoft affords it no particular advantage, and in fact a disadvantage, in asserting a new leadership position.

This leadership vacuum may also have a strong influence on the migration issue faced by PeopleSoft customers. The lack of leading-edge functional innovation from Oracle, particularly in applications, may continue for some time as management continues to grapple with merger activities. With the PeopleSoft product line a potential dead-end for PeopleSoft customers, and Oracle’s own market leadership hampered by recent history, customers looking for product and functional innovation may be drawn more rapidly towards third party alternatives than Oracle may have expected.

Licensing Changes The significant difference in licensing models between Oracle and PeopleSoft is an issue that EAC expects will create problems for Oracle and its new customers. To its credit, Oracle has been exceptionally transparent about licensing, while PeopleSoft has been historically more obtuse about what it actually charges for its products. Key fee structures are different between the two companies: Oracle bases its licenses largely on per-user pricing, while PeopleSoft has a strong revenue-based component to its licensing model, which effectively “taxes” customer success by increasing license cost of as the customer’s revenues grow. Bringing the two models together for every PeopleSoft contract will take some work and no small amount of time.

This should be an area of some concern for PeopleSoft customers: reconciling these two models won’t be easy, something that Oracle has acknowledged, and the added pressure of the financial picture Oracle now faces due to the premium paid for PeopleSoft is significant. These pressures will make it tempting to resolve licensing differences towards the highest revenue-generating option for Oracle. (See The Up-sell Burden below.)

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Maintenance There are important differences in the cost of software maintenance, with PeopleSoft historically more expensive than Oracle. This may provide a disincentive to PeopleSoft customers that want to stay with their existing products: Oracle will have to decide whether to bring maintenance costs in line across all its customers or maintain a two-tier system; and how much a PeopleSoft customer will pay for maintenance if the customer switches to Oracle products still has to be resolved.

However, considering the relative strength of PeopleSoft’s maintenance revenues, cited at the time of the takeover in December 2004 as a rationale for paying an additional premium above Oracle’s “best and final price,” PeopleSoft customers can expect no discounts or price breaks on maintenance as a result of the merger. This should lead to some serious questioning on the part of PeopleSoft customers about the value of paying for maintenance for their PeopleSoft solutions, particularly for a product line that will have no more than one revision (PeopleSoft 9) before being sunsetted in favor of Oracle 12.

Again, this may provide a further incentive to a more rapid migration decision than customers or Oracle executives have considered before. This is particularly true in light of the recent emergence of alternative maintenance providers in the PeopleSoft market. One such provider, TomorrowNow, which SAP announced it would acquire in January, has offered a 50 percent reduction in overall maintenance costs by taking over the maintenance burden for customers that are not interested in functional or maintenance upgrades. TomorrowNow, since its acquisition by SAP, has also come out with a separate offer for joint SAP/PeopleSoft customers that want to eventually move their PeopleSoft functionality to an SAP platform. While this option is only viable for customers that have no future plans for the PeopleSoft product, it offers an important alternative that will also accelerate the decision-making process regarding migration.

Executive Diversion and Lack of Continuity in Management and the Field This is another area where prolonged hostilities in the face of no due diligence have an enormous impact on customer planning. The need to perform due diligence and come up with a comprehensive merger plan will continue to divert senior management for some time to come, further extending the uncertainty that PeopleSoft customers have already had to live with for 18 months. And while Oracle is planning to retain upwards of 90 percent of PeopleSoft’s support staff, as well as a large number of field sales employees, continuity in field relations will be

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difficult. The lengthy battle for PeopleSoft led to a large number of defections from PeopleSoft during the 18-month period, and the final acquisition hastened the departure plans for many additional PeopleSoft employees.

Bridging the Cultural Divide Regardless of the quantity and quality of the personnel that Oracle is able to retain, there will be some significant cultural hurdles to overcome. The differences in Oracle’s business culture versus that of PeopleSoft have been greatly exaggerated, mostly due to Oracle’s reputation for aggressive sales tactics and PeopleSoft’s reputedly laid-back “ashram” culture, but no large merger can take place without some degree of cultural friction. When one considers the longstanding internal cultural friction that has existed within Oracle between the company’s technology roots and its newer applications business – a problem that dates back to the inception of Oracle applications in the late 1980s – it is safe to expect that a significant cultural divide, both with respect to PeopleSoft as well as with respect to the overall position of applications in the larger Oracle business model, will have to be overcome in order for this merger to meet customer expectations.

PeopleSoft Customers and the Up-sell Burden As noted above, the burden to help make good on Oracle’s significant investment in PeopleSoft will have an important potential financial impact on PeopleSoft customers. Oracle is taking on a financial burden at a cost twice its original bid and under circumstances – 18 months of market erosion – that tarnished PeopleSoft’s ability to continue as a stand-alone company. While Oracle executives expressed confidence that the financial due diligence undertaken just prior to the merger made it clear that the final price was worthwhile, the real issues of customer up-sell and customer retention will make it difficult for Oracle to meet its ambitious financial targets for the merger. These targets include a positive net contribution to Oracle’s bottom line in the first year, fueled by a strong product up-sell to the PeopleSoft customer base. At a minimum, EAC expects that Oracle’s revised plans to maintain separate development, sales, and support organizations for PeopleSoft will reduce possible economies of scale and increase overall costs significantly.

Meanwhile, making up the differences through customer up-sell may be more difficult than Oracle envisions. The above factors lead EAC to believe that many PeopleSoft customers will at a minimum put off up-sell decisions until more is known regarding specific product plans, licensing issues, employee continuity and other key issues. No decision at a minimum is good for

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Oracle, assuming that also means “no decision” on whether to continue maintenance payments to Oracle, an assumption under attack from alternative providers like SAP’s TomorrowNow. Though Oracle cannot begin to meet its financial goals based on maintenance revenue alone, “no decision” at least maintains some revenue stream for Oracle.

Those that cannot afford the “no decision” option may be rushed into a more rapid decisionmaking process than Oracle had bargained for. That option, as noted above, has a strong bias in favor of alternatives to Oracle, considering the problems Oracle has been dealt by PeopleSoft’s prolonged hostile resistance and its own internal problems with market leadership.

Also threatening Oracle’s financial success is the fact that those customers that opt to buy will be in a powerful position to seek discounts and other price breaks from Oracle, as they will also be heavily courted by competitors offering extremely favorable contract terms to PeopleSoft customers willing to switch vendors. This competition effect could also impact Oracle’s relations with its existing Oracle 11i customers: Oracle may face pressure from these customers for contract relief if the terms given to PeopleSoft customers are more favorable than those available to existing Oracle customers.

Conclusion: Hostile Mergers and Long-Term Customer Continuity EAC believes that while the jury is still out on what the final result of the merger will be, there are significant factors militating against its success, particularly where success is measured by significant and sustained up-sell revenues from the PeopleSoft customer base. The problems that Oracle would have faced in a friendly takeover have been greatly accentuated by the effect of prolonged hostilities, and may result in an accelerated decision-making process on the part of PeopleSoft customers that could favor non-Oracle solutions.

One main problem with the merger is that, by itself, it does little to improve the market position of Oracle, particularly in light of the lost momentum that both Oracle and PeopleSoft have suffered from in the enterprise software market over the last two years. Indeed, these problems – lack of market leadership and innovation – have been rendered even more problematic by the

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large number of merger-related issues that Oracle must now grapple with before it can turn its attention to its market leadership problem.

At a minimum, EAC expects a larger number of PeopleSoft customers to adopt a wait-and-see attitude, though this may require significant planning delays and continued uncertainty for those customers. Those that can’t wait will most likely be forced into a choice that may not favor Oracle – particularly for that 40 percent of the PeopleSoft customer base that has no significant Oracle infrastructure and is more free to switch vendors and platforms. Even customers that are already using Oracle technology, however, may need innovation, product functionality, and specific vertical industry focus that may not be immediately available from an Oracle that is likely to be consumed for some time with the details of a complex merger and the aftermath of a prolonged period of hostilities. Those customers can, and should, look elsewhere if their business plans require it. Customer loyalty notwithstanding, PeopleSoft customers, and any customers that have been victimized by the impact of a prolonged hostile merger, should take a cue from the vendors and act in their own interests first.

While no one at the time knew what the outcome would be – or even had any idea what could happen in a prolonged hostile takeover – hindsight shows that no one, no customer or software executive, should let hostilities progress as long as they did in the Oracle/PeopleSoft merger. To do otherwise may enrich some stockholders in the short term, but the very real risk of endangering customers and their long-term prospects should also be considered. Fiduciary responsibility notwithstanding, customers are also important stakeholders whose needs should be part of any M&A equation. It is clear that, in the case of Oracle and PeopleSoft, those needs were not met as well as they should have been.

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Appendix 1: Oracle/PeopleSoft Timeline Highlights (Source: SearchCRM.com. Abridged)

2003 June 2:

PeopleSoft and J.D. Edwards announce a $1.7 billion stock deal to merge.

June 6:

Oracle launches a hostile takeover bid for PeopleSoft.

June 12:

PeopleSoft's board unanimously votes to recommend that shareholders reject the Oracle offer. CEO Craig Conway holds a conference call to reiterate plans to fight the takeover attempt.

June 13-16: PeopleSoft and J.D. Edwards each file lawsuits against Oracle and alter the terms of their merger agreement. PeopleSoft turns the all-stock deal into a cash/stock combination that would no longer require shareholder approval. June 20:

PeopleSoft's board votes to recommend that shareholders reject Oracle's revised offer. An Oracle executive tries to reassure PeopleSoft customers that their products would be supported.

July 18:

PeopleSoft said it has completed its acquisition of J.D. Edwards, making Oracle's takeover bid more difficult.

Aug. 26:

PeopleSoft brings back its customer assurance plan. The money-back program helped drum up business immediately following the Oracle takeover bid.

Aug. 13:

PeopleSoft revises its lawsuit against Oracle and alleges new facts about unfair trade practices

Sept. 15:

At PeopleSoft's annual user event, CEO Craig Conway jokes about rival Larry Ellison before thanking customers for sticking by PeopleSoft during a tough time.

Nov. 17:

The European Union Commission announced it will launch a four-month investigation into the proposed takeover, ruling that the bid requires "further analysis."

Nov. 19:

PeopleSoft extends its customer refund program through the end of the year.

Copyright 2005 EAC

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2004 Feb. 26:

The U.S. Department of Justice files suit to block Oracle's hostile takeover bid for PeopleSoft.

Sept. 9:

A federal judge rules that Oracle's takeover would not violate antitrust rules, though several obstacles stand in the way of a PeopleSoft acquisition

Sept. 21:

At its annual user conference, PeopleSoft announces a partnership with IBM as it continues to fend off Oracle.

Oct. 1:

The Department of Justice drops its plans to appeal the U.S. District Court's decision. PeopleSoft fires CEO Craig Conway citing a lack of confidence.

Nov. 10:

PeopleSoft's Board again spurns Oracle telling shareholders to do the same.

Nov. 20:

A majority of PeopleSoft shareholders met Oracle's deadline and agreed to tender their shares.

Dec. 13:

PeopleSoft relents and accepts Oracle's sweetened offer of $26.50 per share.

Copyright 2005 EAC

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