Oracle's plans for PeopleSoft have never been harder to
read than they are now.
For most of the past 16 months the chances of Oracle taking over
PeopleSoft have been firmly in the "unlikely" category. The
expected opposition of anti-trust regulators was one factor, but
the biggest obstacle for Oracle was the resistance of PeopleSoft's
management.
While PeopleSoft was led by a chief executive officer (CEO)
claiming the company was not for sale at any price, Oracle had
little hope of successfully acquiring PeopleSoft through its tender
offer to shareholders, now valued at $7.7bn (£4.3bn). Thanks to
PeopleSoft's poison pill, the company's board of directors can
essentially deflect Oracle's advances for as long as they remain in
office.
But the dynamics of the situation between Oracle and PeopleSoft
have changed from stand-off to detente with the firing of Craig
Conway as PeopleSoft's CEO and the testimony by PeopleSoft director
Steven Goldby this week that he would be open to discussions with
Oracle if the price were right.
So how likely is the deal to be completed? On the one hand,
David Duffield, the new CEO selected by PeopleSoft's board, strikes
long-time customers and observers as an odd choice if the board
hopes to quickly strike a deal with Oracle.
As one of PeopleSoft's founders, Duffield has a reputation for
being deeply committed to PeopleSoft's customers, who
overwhelmingly oppose the deal.
On the other hand, with shareholder interest building in the
cash Oracle is offering and with anti-trust blocks to the deal
nearly gone, PeopleSoft's board may not be able to continue its
resistance.
Goldby said he would consider negotiating with Oracle "if there
is ever an indication that Oracle is willing to pay what we
consider to be the right price for the shareholders to get for this
company, and there is a high certainty of being able to close a
transaction quickly."
The Yankee Group said in a research note that it believes
PeopleSoft's executive team "is clinging to the hope that Duffield
can muster support to prevent shareholders from voting in favour of
the buyout, but is largely resigned to the takeover".
Oracle has asked a Delaware court to void PeopleSoft's
anti-takeover "poison pill" provision and its "customer assurance
programme" promising customers compensatory payments if PeopleSoft
is acquired by a company that disrupts its product development and
support plans.
The poison pill provision in PeopleSoft's bylaws allow its board
to inflate the company's outstanding shares total and make a
hostile takeover prohibitively expensive.
On the first count, Oracle faces long odds, experts say.
Delaware courts have not overturned a poison pill since the late
1980s, according to William Lawlor, a Dechert partner who leads the
firm's mergers and acquisitions group.
But if Oracle opens discussions with PeopleSoft's board and wins
its support for the acquisition, the poison pill issue becomes
moot. How likely is that? It's impossible to tell.
While Goldby, in his testimony to the Delaware court, seemed to
open a door to Oracle, he also reiterated that PeopleSoft's board
considered and rejected as inadequate the $26 per share cash offer
Oracle made earlier this year, before Oracle lowed its bid to the
current $21.
He also emphasised that decisions about the Oracle bid are made
by a five-person committee of PeopleSoft's independent directors.
While Conway, and now Duffield, could comment on Oracle's offer,
the CEO has little direct influence over whether it will be
accepted - meaning that the resistance so far to the bid has come
unanimously from all of PeopleSoft's directors.
Oracle could advance its bid by raising its offering price, but
there's only so high the company can go before it risks alienating
its own shareholders. Financial analyst Chris Kwak, of the
Susquehanna Financial Group, said that if the paying price creeps
much higher, Oracle would generate better value for its
shareholders by spending the billions it would pay for PeopleSoft
on a stock buyback instead.
"A lot of people believe Oracle will have to raise its bid,"
Kwak said. "Our view has been that $21 [per share] is a pretty
generous offer.
"It may be that the intrinsic value of PeopleSoft is less than
$21 [per share], but the value of PeopleSoft to Oracle is more than
that, if they are successful in finding synergies and reducing
headcount. Still, if the price gets too high - beyond $23 or $24
[per share] - Oracle would do better to back away and buy back its
own stock."
As PeopleSoft customers continue to face uncertainty about the
future of their supplier, the best thing they can do is update
their software to the latest versions to protect their investment
if PeopleSoft's development is disrupted, advises Meta Group
analyst Barry Wilderman.
He gives the acquisition an 80% chance of happening at this
point, but whether or not it would be a good move on Oracle's part
depends on how well it supports PeopleSoft's customers and how many
they retain, he said.
"Some people will migrate to Oracle's applications, but some
will go to rivals like SAP, and some will stay on PeopleSoft and go
to third-party providers to maintain the applications," Wilderman
said. "If Oracle can carry over, say, 80% of PeopleSoft's customer
base, this is a good deal for them. If it's 60%, it's not a good
deal."
Customers relying on PeopleSoft's customer assurance programme
to protect their investment may be out of luck: Lawlor said that
while the Delaware judge is unlikely to void PeopleSoft's poison
pill, he might "split the difference" and invalidate the
programme.
"Oracle has put together a pretty good case," he said. "They may
get a sympathetic hearing from the judge. If I were betting, I
would say he may very well strike down the [customer assurance
programme] as being an overly draconian measure. It's a little
muddy how the court would fix the problem there, but I think
there's a good chance he will look at it."
Stacy Cowley writes for IDG News
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