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Software's mating season
A judge's blessing for an Oracle-PeopleSoft deal could spark a long overdue software shakeout.
September 10, 2004: 4:13 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Though it looks like Oracle will be allowed to buy PeopleSoft after all, whether that deal actually takes place is still up in the air.

But Wall Street is not only betting that PeopleSoft will soon give in to Oracle but that the entire software sector is one step closer to undergoing a wild and woolly wave of merger activity.

Investors bid up shares of PeopleSoft more than 10 percent Friday after federal district judge Vaughn Walker ruled Thursday evening that the Department of Justice did not prove that Oracle's planned hostile takeover of its rival would violate antitrust law. (The DOJ sued Oracle in February to block the deal.)

Sure, the courtroom drama is far from over. The DOJ could appeal Judge Walker's decision. The European Union is still conducting its own anti-trust review. And PeopleSoft has a lawsuit of its own filed against Oracle, alleging that Oracle has engaged in unfair business practices. (A trial is set for Nov. 1.)

But based on the market's reaction to the news, it's going to be tougher for PeopleSoft to justify why it shouldn't sit down with Oracle and hash out a friendly deal.

Even after PeopleSoft's big move Friday, the stock was trading at about $19.80, below Oracle's $21 a share takeover offer.

"The chief defense PeopleSoft was hiding behind was the antitrust argument and that's been basically thrown out," said Steven Cohen, chief investment officer with Kellner DiLeo Cohen, a hedge fund that owns shares of PeopleSoft. "I would hope at some point PeopleSoft's board would sense that it's incumbent on them to act on the behalf of shareholders."

Gary Abbott, an analyst with Merriman Curhan Ford, also thinks that PeopleSoft would be wise to agree to a deal now that the antitrust hurdle appears to be in the distance. He adds that Oracle probably stands a good chance of clearing an EU review as well since he does not believe that an Oracle-PeopleSoft merger would be anti-competitive.

Oracle and PeopleSoft have both underperformed the broader tech market during their takeover battle.  
Oracle and PeopleSoft have both underperformed the broader tech market during their takeover battle.

To the contrary, Abbott said an Oracle acquisition of PeopleSoft would probably make Oracle a tougher rival to SAP in the enterprise software business, selling software which helps large corporate customers automate routine daily business tasks.

"Competition between Oracle and SAP is intense. They're not going to collude because they want to kill each other," said Abbott.

Match making

But even if PeopleSoft continues to fight off Oracle's advances and ultimately prevails, Oracle has already given an indication during the summer's antitrust trial that it has a takeover wish list with many more names on it. As such, PeopleSoft was not the only software company to get a merger speculation-induced bump Friday.

Lawson Software shot up more than 5 percent and Business Objects gained nearly 7 percent while Siebel Systems and BEA Systems each gained more than 8 percent. All four had been mentioned as being on Oracle's list of possible acquisition targets.

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Now of course, Oracle can't buy all of these companies. But clearly, there is a need for a shakeout in the increasingly crowded market for enterprise software. And Judge Walker's decision does seem to send a strong signal to software companies that the courts would view most software deals in a favorable light.

"This could encourage software companies that might have been sitting on the sideline to proceed with potential mergers," said Cohen.

Richard Williams, an analyst with Garban Institutional Equities, said there is a need for more mergers since the enterprise software industry is reaching maturation. He added that Oracle's unwillingness to walk away from PeopleSoft clearly shows how tough times are in the software business.

"The biggest lesson we've learned from this is just how serious Oracle is to find another revenue source," said Williams. "It's painfully obvious that their own business is not doing well enough that they are pursuing this with such ferocity."

Computer Software
Mergers - Acquisitions - Takeovers
PeopleSoft Incorporated

And even though there has already been a fair amount of consolidation in the sector, the industry remains highly fragmented. What's more, there have been several software initial public offerings this year as well, with, Motive and RightNow Technologies all going public.

"It's pretty evident that this is a sector that badly needs to consolidate to create efficiencies and weed out the weak players," said Cohen. "There are simply too many software companies."

To that end, Abbott said that he thinks any enterprise software company with revenues of between only $200 million and $2 billion would probably be fair game for a larger software company like Oracle, SAP, IBM and Microsoft, which are doing all they can to convince their customers to buy more from them. And according to a search on the Thomson/Baseline database, there are more than sixty that fit this criteria.

Williams named several companies on that list that he thinks will be eventually taken over. In addition to Lawson, Siebel and BEA, he cited Manugistics, Retek and JDA Software as acquisition targets.

"It's going to be a feeding frenzy," said Williams. "Anyone with a low stock price and poor results is vulnerable."

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies.  Top of page

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