Software stocks rose as investors and analysts reacted to a US court's decision in favour or Oracle's move to take over PeopleSoft.
Oracle still faces significant hurdles, including strong opposition from PeopleSoft's customers and executives, who can use anti-takeover provisions in the company's bylaws to resist pressure from shareholders to accept Oracle's $7.7bn (£4.28bn) offer.
Oracle chief executive Larry Ellison made it clear during the trial that PeopleSoft is just one item on his shopping list. The latest ruling increases speculation about Oracle and other software houses' takeover plans.
In a court deposition Ellison listed CRM leader Siebel as his second-choice target, followed by middleware supplier BEA .
Part of the government's argument at the trial was based on a 2003 Oracle board presentation about potential acquisitions, which included detailed examinations of the pros and cons of buying PeopleSoft, Siebel and BEA, along with Sybase, Business Objects, Lawson Software, Cerner, JD Edwards (which PeopleSoft later purchased), Documentum (later bought by EMC), and SCT (bought by SunGard Data Systems).
Microsoft has considered stepping up its efforts to crack the business applications market through acquisitions. It was in talks to buy SAP but decided such a large deal would be too risky. It now says it is content to grow its CRM and ERP business organically and through collaborations with partners but many observers, including the judge who decided the DOJ/Oracle case, are not convinced.
"[Microsoft Business Solutions head, Doug Burgum's] humility about Microsoft’s intentions regarding the failed SAP alliance and the successful BearingPoint alliance was unconvincing. It strains credulity to believe that Microsoft would offer billions of dollars to acquire SAP merely to make data processing easier for customers who use both Microsoft Office and SAP ERP," Judge Vaughn Walker wrote, discounting Burgum's testimony portraying Microsoft BS as a humble mid-market supplier .
Robert Stimson, author of a Bank of America Securities report on the ruling, expects that a PeopleSoft-Oracle union is only a matter of time but he also sees the case sparking a broader buying spree, "a major consolidation wave in software that will occur over the next two to three years", Stimson wrote.
Industry analysts point out that consolidation is already under way. In the 17 months since Oracle compiled its wish list, three of the 10 companies on it were bought by others.
Some disagree, saying they don't think Oracle's actions will accelerate the consolidation. "I wouldn't say generally this opens the floodgates to more large mergers like this," said Meta Group analyst David Yockelson. "I think we're going to see more mergers and acquisitions, but I don't think this is the bellwether for it."
The ripest targets in the market are smaller companies that serve specific industry niches or midmarket customers. While enterprise sales have been slow in the software market in recent years, sales to small and mid-sized companies are growing rapidly. Yockelson said that if Oracle does buy PeopleSoft it may be better served to concentrate development on the midmarket product lines PeopleSoft picked up from JD Edwards, rather than focusing on PeopleSoft's enterprise applications.
A number of companies have already bought smaller suppliers to accelerate their efforts to tap new markets. Microsoft bought Great Plains Software and Navision, while PeopleSoft got J D Edwards, Siebel snapped up hosted CRM supplier UpShot and banking software maker Eontec and EMC bought Documentum to expand its offerings from storage to full-service content management. IBM has bought more than a dozen of its software business partners to flesh out its middleware products.
But now, with soft sales dragging down the share prices of some of the market's biggest suppliers and making them more affordable, top-tier software companies could find themselves targeted by rivals. BEA and Siebel have long been the subject of takeover rumors. Meta Group's Yockelson said he does not expect the Oracle decision to prompt other suppliers to rush into big, expensive deals, but he does think that in a mature market like enterprise software, suppliers will be tempted to expand their customer lists by buying their rivals.
Enterprise Applications Consulting analyst Josh Greenbaum expects Oracle to continue cutting an acquisitive path through the industry.
"Deep down, I think Larry Ellison realises he needs to be as much like IBM as possible to beat them," Greenbaum said. "There's a lot of enterprise software companies, more than the market economics can bear right now. This is a legal precedent that lets companies start rolling up the market."
One antitrust expert following the case, attorney Paul Friedman of Dechert, cautioned that beating the DOJ once does not give Oracle carte blanche to buy any company it likes. The DOJ tends to learn from its losses, and is willing to oppose again companies that have vanquished it once, he said.
Companies may also be dissuaded from trying hostile attacks like Oracle's by the ancillary effects of such tactics. A recent report from research firm Techtel found Oracle's corporate image at a record low, as the company drew its worst scores in more than a decade from IT buyers. Not surprisingly, some current PeopleSoft customers have scathing views of Oracle.
"We really do not want to be an Oracle customer. The statements Larry Ellison has made definitely give us some concern about what he has planned for PeopleSoft," said Andrew Albarelle, principal executive officer of Denver staffing company Remy.
He is more willing to see PeopleSoft fall into the hands of another supplier like Microsoft, should it decide PeopleSoft would make a good consolation prize for losing SAP.
Research firm The Sageza Group forecasts market consolidation, but hopes it won't happen by Oracle fiat. "Where we disagree strongly with Ellison is the means by which this irresistible path of consolidation should happen," the firm said.
"By simply tossing PeopleSoft out of the market, its sizeable collection of market adaptations will be lost and evolution will be thwarted.'"
In the end, PeopleSoft may not be able to fend off Oracle, Sageza said - a result it sees as detrimental to PeopleSoft's customers. Their only consolation may be seeing Oracle pay dearly for its hostile takeover.
The firm concludes, "We would counsel PeopleSoft stockholders - if forced to face the inevitable - to hold Ellison to committing as much money as possible for each and every share."
Stacy Cowley writes for IDG News Service