Oracle faces daunting challenge integrating PeopleSoft

PeopleSoft's acceptance of an Oracle takeover finally ends 18 months of uncertainty for both companies' customers, but opens new...

 PeopleSoft's acceptance of an Oracle takeover finally ends 18 months of uncertainty for both companies' customers, but opens new challenges. As Oracle embarks on one of the software industry's largest acquisitions in history, it needs to prove it can chew what it has bitten off.

Oracle has offered reassurances about its intention to support PeopleSoft customers, but it is an open question how well they will live up to expectations, said John Webster, PeopleSoft programs director for Dakota State University's Center for Remote Enterprise System Hosting (Cresh).

"There's a whole lot of uncertainty out there," Webster said. "Will they hold true to their word? Prior to the sale, [promising support] is a marketing tool. Now it is an expense."

Webster's program, which trains students to support PeopleSoft deployments at other educational institutions, is in the process of starting up a commercial PeopleSoft services firm, Cresh. Over the past few months, Webster has received queries from PeopleSoft customers exploring their options for outside maintenance of their applications. Webster sees the Oracle acquisition changing, but not destroying, Cresh's business.

"We can look for new opportunities," he said. "The customers still believe in the software."

Meta Group software research director David Yockelson did not expect any immediate changes for PeopleSoft customers, but saw the deal reshaping the direction of the software industry. Although Oracle said buying PeopleSoft will help it compete with enterprise applications leader SAP, Yockelson saw the company's new opportunity to expand its infrastructure market share as more compelling.

"This was never about the applications assets," he said. "Owning the applications does not immediately launch Oracle to the level of a competitor with SAP."

What it does do is give Oracle the chance to sell its database, application server and other infrastructure software into PeopleSoft's customer base, to run beneath PeopleSoft's applications. Oracle already owns a chunk of that market, but so does IBM, which had tight ties to PeopleSoft and JD Edwards (which PeopleSoft bought last year).

IBM and PeopleSoft reached a middleware alliance agreement in September that then-PeopleSoft chief executive Craig Conway called the most significant applications partnership in both companies' history. Conway said PeopleSoft and IBM would invest £51m over the next five years in joint development and sales activities.

Less than two weeks later PeopleSoft's board replaced Conway as with PeopleSoft founder David Duffield. IBM representatives had no comment on the fate of the company's PeopleSoft alliance.

Several analysts cited IBM as the company most harmed by the Oracle-PeopleSoft merger. "Their biggest applications partner is now their biggest competitor," said analyst Josh Greenbaum of  Enterprise Applications Consulting.

Greenbaum said having a large applications rival may actually help SAP, which spent the last year growing its US business by winning bids against the distracted PeopleSoft and Oracle. Companies often do their best when facing a fierce competitor, he said.

SAP spokesman Bill Wohl said his company agreed with the analysts that it benefited from the PeopleSoft-Oracle wrangling - and it expects to continue doing so.

"We have said through this entire period that SAP sees itself as well-positioned to compete regardless of the outcome. The era of uncertainty is far from over. Oracle has a long period of integration ahead, and that is not going to be easy," Wohl said. "We look like a very safe harbor in a very stormy sea."

Oracle's stock closed at £7.59, up 10% on Monday on the Nasdaq exchange, but the company will need to convince Wall Street that its PeopleSoft takeover is worth the £5.34bn it had to pay to close the deal.

"There is definitely a risk it does not pay off," said Yockelson. "It is not a bad move, but it is a fairly expensive one."

Jeff Embersits, who runs Shareholder Value Management said, "I think this will be a fairly big disaster. I am just waiting to see where the stock settles to decide when to recommend a sell. Oracle decided for some reason not to back off and they paid an exorbitant price. No one has ever tried an integration like this and Oracle has no track record of acquisitions."

Still, for at least some customers, finally reaching the end of one of the industry's most bitter tug-of-wars is a relief. "We finally have a stake in the ground and can start making decisions," said Webster.

As much as Oracle celebrates taking down one rival and bulking up for battle with another, the company was in some ways backed into growing by acquisition. Enterprise software makers, particularly applications developers, since the post-bubble economic collapse have struggled with longer sales cycles and a market more cautious about buying their expensive wares.

"This was also a defensive move," Yockelson said. "Oracle is not going to speedily win business from IBM or Microsoft by sitting still. It has a chance to control its own destiny."

Stacy Cowley writes for the IDG News Service

 

This was last published in December 2004

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