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Software shakeout
Even if Oracle doesn't end up buying PeopleSoft, more software mergers are likely. So who's next?
June 7, 2003: 2:33 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Let the games begin.

Oracle stunned the market on Friday with an unsolicited bid for rival software company PeopleSoft. This comes just four days after PeopleSoft announced that it was acquiring another software company, J.D. Edwards.

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Oracle CEO Larry Ellison talks about his $5.1 billion bid for PeopleSoft and what lies ahead for his company.

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PeopleSoft CEO Craig Conway, in a written statement, called the offer "atrociously bad behavior from a company with a history of atrociously bad behavior." And in an interview with German newspaper Euro am Sontag Saturday he said he could imagine no conditions under which he would recommend the deal to PeopleSoft shareholderes. But PeopleSoft said it would review the offer and make a formal decision soon.

So what is Larry Ellison, Oracle's enigmatic CEO, thinking? And will this speed up consolidation in the software sector?

Oracle, which is among the leaders in the database software market, has also been trying to grow in the more lucrative "enterprise software" area, which helps companies deal with customers, suppliers and employees.

Too much capacity

But as corporate technology budgets have dried up, software companies are increasingly coming to the realization that there are too many companies chasing too little business.

For this reason, Oracle's desire for PeopleSoft is being viewed more as a way for the company to eliminate some of the excess capacity in the sector and not as a way to enter new product areas. Oracle said it would not sell PeopleSoft products, but instead would switch PeopleSoft customers to Oracle's eBusiness product line.

"Oracle is essentially trying to get rid of a competitor," said Sunil Reddy, manager of the Fifth Third Technology fund. "This is more of a financial transaction than a technology transaction."

Takeover targets?
Several software stocks rose on Friday following Oracle's bid for PeopleSoft.
CompanyPrice change*
Siebel Systems1.8%
Hyperion Solutions5.6%
Business Objects4.2%

Reddy does not own either stock in his fund but he does own several other enterprise software companies, including BEA Systems, Veritas Software and Documentum. All three stocks were relatively flat Friday.

Investors seem to be betting that if Oracle is successful -- and that's far from certain since PeopleSoft's stock closed at $17.82 Friday, well above Oracle's $16-a-share offer in a clear sign that many expect a higher bid to emerge -- that will launch a new wave of consolidation in the software industry. (For more about Friday's action in software stocks, click here.)

All for one, one for all

Even if Oracle's effort to snare PeopleSoft fails, the mere fact that it is willing to do a deal is a good sign. "Companies are feeling more confident in their ability to operate in these tough economic times and are now looking at what to do in order to be competitive going forward," said Patrick Mason, an analyst with Pacific Growth Equities.

Richard Williams, strategist with independent research firm Summit Analytic Partners, said that an Oracle-PeopleSoft merger would put pressure on SAP and IBM to make more acquisitions in the enterprise software area.

SAP has traditionally avoided acquisitions but IBM has been fairly active in the past few years, scooping up database software firm Informix in 2001 and Rational Software, which develops modeling tools for software developers, earlier this year.

Microsoft can't be ruled out either, given its $46 billion mountain of cash. The company has made some small enterprise software deals in the past few years, taking over Great Plains in 2001 and Navision last year.

As for targets, Williams said Siebel Systems, the closest rival to PeopleSoft and SAP, would be in play since it would be tough for Siebel to compete against SAP and a bigger Oracle on a standalone basis. Shares of Siebel Systems jumped 2 percent on Friday. And shares surged earlier in the week on rumors that IBM was interested in acquiring the company.

More about tech M&A
Oracle bids $5.1 billion for PeopleSoft
The M&A wave starts
Tech: Let's make a deal
More tech mergers please

Williams said that other business software companies, including security software firms Symantec and Network Associates, could also be ripe for takeovers as the largest software companies seek ways to offer their customers all-in-one suites of software.

Mason said that business intelligence companies, which develop software that helps companies filter through data more effectively, have strong cash positions and are in a unique position to either acquire smaller companies or sell out to larger rivals. Shares of three leaders in this market -- Cognos, Hyperion Solutions and Business Objects -- each gained more than 2 percent on Friday.

Analysts quoted in this story do not own the shares of any of the companies they follow and their firms have no investment banking relationships with them.  Top of page

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