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Wall Street to Oracle: Walk away
Oracle vows to fight the DOJ's decision to block its bid for PeopleSoft. But it's time to move on.
February 27, 2004: 5:05 PM EST
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - Wall Street has the following words of advice, courtesy of Kenny Rogers, for Oracle CEO Larry Ellison: Know when to walk away.

The Department of Justice announced Thursday that it will block Oracle's hostile takeover bid for rival software firm PeopleSoft. But Oracle quickly countered, saying that it would fight the ruling in court.

 
Oracle's stock hasn't moved much since making a hostile bid for PeopleSoft.

This software soap opera is approaching its ninth month. But Oracle is no closer to winning PeopleSoft now than it was when it first announced its hostile bid in June, despite having raised the price of the bid twice. (It now stands at $26 a share, or $9.4 billion.) Analysts and fund managers think it's time for Oracle to concede defeat.

"I was kind of hoping that Oracle would drop the bid," said Matt Kelmon, president of Kelmoore Investment Co., which owns Oracle in the Kelmoore Strategy Eagle fund. "My best guess is that the deal will never get approved."

Oracle stock flat while rivals soar

Shares of Oracle (ORCL: Research, Estimates) fell more than 3 percent Friday. The stock has lagged the performance of most of its competitors since June. Shares of Oracle are essentially flat since the company made its initial offer for PeopleSoft (PSFT: Research, Estimates). Meanwhile, shares of SAP (SAP: Research, Estimates) have surged 35 percent and PeopleSoft's stock has surged 41 percent.

PeopleSoft has benefited not only from Oracle's interest but also from improving fundamentals following the closing of its own merger with J.D. Edwards.

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Still, Oracle and PeopleSoft both trail SAP in the application software market, a lucrative part of the software world. Application software helps big companies automate routine functions such as human resources, supply chain management and customer relations.

Oracle, which generates most of its sales from the maturing database business, is trying to make a bigger splash in applications. The company was hoping to gain PeopleSoft's customers through a merger.

However, Oracle has recently shown signs of momentum in its own application business. The company reported strong fiscal second quarter results in December. The third quarter is set to close this Sunday and Oracle will report third quarter numbers sometime in March. Analysts are expecting a 9 percent year-over-year increase in sales and earnings.

But the continuing takeover saga could distract Oracle's management for months or longer and that could cause Oracle to lose momentum and focus even as the software market recovers.

"This is a company that is now facing a very competitive landscape and the management team, rather than going quietly into that good night, is now going to spend on a costly legal battle with the government," said Jason Brueschke, an analyst with Pacific Growth Equities.

What's more, the battle is probably a losing one. Even if Oracle succeeds in overturning the DOJ's decision, it's likely to face an even more formidable challenge. "I'm pretty confident that they'll be fighting the European Union as well," said Brueschke.

The EU has a history of scuttling high profile deals. It blocked General Electric's proposed acquisition of Honeywell in 2001. The agency also rejected the planned merger between Sprint and WorldCom in 2000.

Time to find another target

So history is not on Oracle's side. And that's all the more reason for the company to give up and move on. It seems to some that the takeover fight is becoming more ego-driven than anything else. PeopleSoft CEO Craig Conway used to work for Oracle and he and Ellison have been exchanging pointed verbal jabs since June.

"If Oracle continues to fight, this stops being an economic decision for the company and looks more and more like an emotional decision," said Richard Williams, an analyst with Summit Analytic Partners.

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Oracle also announced Thursday that it no longer plans to nominate candidates for PeopleSoft's board of directors at its March 25 annual shareholder meeting since the legal issues will not be resolved by then. But Oracle extended the deadline on its PeopleSoft offer until June 25.

This never-ending story is starting to alienate those who believe in Oracle for the long-term. Kelmon said he's considering selling his Oracle stake because even if the company reports a solid third quarter, investors might not get too excited given the looming legal fight.

Alan Loewenstein, co-manager of the John Hancock Technology fund, which owns Oracle, said he still thinks Oracle is worth more than the current stock price but he is also growing tired of the PeopleSoft saga.

"I'd like for Oracle to walk away and possibly buy something else," said Loewenstein. Wall Street has often mentioned BEA Systems (BEAS: Research, Estimates), a developer of infrastructure software that helps companies manage e-commerce capabilities, as another logical takeover candidate for Oracle. But Ellison has publicly said that the stock is too expensive.

Still, at this point it seems like the major beneficiaries of Oracle's pugnacity are attorneys, not Oracle shareholders.

"If Oracle wants to spend more money on lawyers, they should go ahead, but investors should be planning for a world where Oracle and PeopleSoft are separate," said Brueschke. "Unfortunately, the script of this movie ends with Oracle being disappointed."

Analysts quoted in this story do not own shares of Oracle or PeopleSoft and their firms have no investment banking relationships with the companies.  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.