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Who's the real winner of the Oracle-PeopleSoft takeover battle? German software giant SAP.
June 1, 2004: 11:08 AM EDT
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - Can you believe it's been almost a year since Oracle launched its hostile takeover offer for PeopleSoft?

Yup. Larry Ellison announced he wanted to purchase PeopleSoft on June 6, 2003 to boost Oracle's presence in the lucrative applications market, selling software to big businesses that helps automate human resources, customer relationship and payroll functions.

There have been a lot of plot twists during this sordid software saga (alliteration is fun!). But one thing has remained constant: applications-software leader SAP (SAP: Research, Estimates) -- based in Walldorf, Germany -- is laughing all the way to the Bundesbank.

Shares of the Teutonic technology titan (even more fun!) are up 32 percent since the drama began. Meanwhile, PeopleSoft (PSFT: Research, Estimates) stock is virtually unchanged and Oracle (ORCL: Research, Estimates) has fallen 13 percent.

"SAP was already way ahead of PeopleSoft and Oracle," said David DuChene, a software analyst with Firsthand Capital, a technology mutual fund firm. "But Oracle's moves toward PeopleSoft came at a particularly fortuitous time for SAP because it had been doing a lot of work in the previous couple of years to rebuild its North American operations."

Software soap opera good for SAP

And SAP will very likely continue to be the best bet in the sector as the Oracle-PeopleSoft battle drags on.

Despite the fact that PeopleSoft has rejected four Oracle offers, the Department of Justice has sued Oracle in an attempt to block the deal on antitrust grounds (assuming that the deal were ever consummated to begin with). That trial is set to begin on June 7.

Brendan Barnicle, an analyst with Pacific Crest Securities, said that regardless what happens with the trial, it's hard to imagine a resolution anytime soon. If the DOJ wins its case, Barnicle expects Oracle to appeal. And if the DOJ loses, Oracle then has a more credible offer that PeopleSoft would have to consider, he said.

All that adds up to even more disruption in the marketplace, which plays right into SAP's hands.

What's more, Barnicle points out that SAP could also benefit from a strengthening dollar, a perk most of its competitors won't enjoy. U.S. based companies have seen the value of international sales boosted over the past few months because of the weak dollar. But the opposite is true for SAP, which reports its revenues in euros.

Even if Oracle wins, SAP could benefit

Still, what happens if the unthinkable occurs, namely Oracle wins its court case, convinces PeopleSoft to sell out and then also gets the deal approved by European Union regulators. Would a combined Oracle-PeopleSoft be a formidable threat to SAP?

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DuChene doesn't think so. He points out that PeopleSoft already is facing a challenge integrating its merger with software maker J.D. Edwards, which it announced just four days before Oracle swooped in with its takeover bid. So Oracle would have a lot of balls to juggle if it bought PeopleSoft.

"Should Oracle get over all the hurdles, the sheer complexity of trying to integrate Oracle with PeopleSoft and J.D. Edwards would be, in my opinion, a nightmare," said DuChene. "If I were a consumer of those products, SAP would look much more attractive to me."

However, SAP's good fortune comes at a not so cheap price. The stock trades at 27 times 2005 earnings estimates, a steep premium to Oracle and PeopleSoft.

Tech Biz
Oracle-PeopleSoft takeover
By Paul R. La Monica

But given its market share lead and a projected long-term earnings growth rate of 14 percent annually compared to 10 percent for Oracle and PeopleSoft, it probably deserves a higher valuation.

"SAP is clearly taking share in the applications market and that's hurting PeopleSoft and Oracle," said Barnicle. "This is exactly the time for investors to get involved in SAP."

Barnicle does not own shares of any of the companies mentioned and his firm has no banking ties to any of them. SAP is a top ten holding in the Firsthand Global Technology and Firsthand Technology Leaders funds. Firsthand also owns a small position in SAP in its Firsthand Technology Value fund and a small stake in Oracle in the Technology Leaders fund. Firsthand does not own shares of PeopleSoft.

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