PeopleSoft ( PSFT) shares have bucked the tech slide in recent days, enjoying a rebound as investors game Oracle's ( ORCL) chances of winning the government's antitrust case. Shares of PeopleSoft rose 11 cents, or 0.6%, to $18.19 Wednesday, completing an 8.1% jump since July 6, a day before the company
warned of disappointing quarterly results. By contrast, the Goldman Sachs Software Index has fallen 3.8% during the same period while Oracle's stock is down 3.7% after falling 1.9% to $10.79 on Wednesday. PeopleSoft's gain comes as some investors see rising odds of Oracle defeating the Department of Justice's bid to block its hostile takeover of its rival. Bolstering that argument, say its adherents, is a court order signed July 10 asking both sides for more detail on the legal theory behind the case. "It's a much closer call than anticipated when the government brought its suit," said Steven Cohen, an M&A arbitrage fund manager with Kellner DiLeo Cohen & Co. in New York. The conventional wisdom was the DOJ would have the upper hand, but Oracle ended up with a surprisingly strong showing in court, explained Cohen, whose firm holds PeopleSoft shares. Now "I think people are saying, 'Gee, if Oracle prevails here, they may really get this thing cranked up again, and PeopleSoft is going to have a major problem and they're going to have to do something,'" Cohen added. "The whole takeover thing gets new life breathed into it." Cohen cited the four-page order from U.S. District Court Judge Vaughn Walker as a sign the judge is skeptical about the case. In that order, the judge asked both sides to provide more guidance on assessing the competitive effects of the acquisition. The legal theory for assessing such effects that seems most appropriate for the DOJ's case "appears to have received substantial criticism from antitrust scholars and little, if any, exposure in the crucible of litigation," Walker wrote.
In a note Tuesday, Erik Olbeter, an analyst with Schwab Capital Markets Washington Research Group, characterized that comment as a "stinging criticism" which reveals the judge has serious issues ruling in favor of the plaintiffs based on their legal doctrine. Olbeter consequently increased his odds of an Oracle victory to 70% from 55%. Similarly, J.P. Morgan analyst Adam Holt wrote in a note Tuesday that he believes the odds may be shifting in Oracle's favor. "Having closely monitored the trial over the last month, we do not believe the evidence and testimony provided fully supports the key points the DOJ was required to prove as the prosecution, and the odds are moving in Oracle's favor," he wrote. The main problem in the case, Holt argued, is the DOJ's narrow definition of the market as high-end applications software in the U.S. The government claims Oracle's proposed $7.7 billion hostile takeover of PeopleSoft would stifle competition at the highest end of the software market, leading to higher prices and a slowing of innovation. The government claims just three companies -- Oracle, PeopleSoft and SAP ( SAP) -- have the advanced human resources and financial management software needed to automate back-office functions in complex business enterprises. But Holt believes the trial showed smaller vendors are meaningful competitors, while testimony from Microsoft ( MSFT) and IBM ( IBM) indicated software infrastructure will foster more innovation in applications going forward. (Holt has an overweight rating on Oracle and a neutral rating on PeopleSoft; his firm has received non-investment banking compensation from both firms in the past year.) But at least one legal expert disagrees. "When you go back and read this whole thing through, I think it's neutral to government-friendly," Robert Doyle, an antitrust lawyer with the firm Sheppard Mullin Richter & Hampton in Washington, D.C., said of the judge's order.
First, he believes the judge has accepted the DOJ's market definition because the order states: "It appears from the evidence that 'high function' enterprise applications software is neither homogenous nor standardized and transparent in pricing." Second, if Walker had rejected the DOJ's legal theory and thought Oracle had presented a compelling enough case to rebut it, then he wouldn't have issued the order, Doyle said. Instead, the judge is seeking guidance from both sides on how to apply what is called the "unilateral effects theory" for analyzing claims of competitive harm from an acquisition, Doyle continued. That theory applies when a combined company becomes large enough to become a monopoly that can raise prices without a competitive reaction, he explained. Indeed, the judge notes: "The parties have cited, and the court is aware of, only a handful of cases considering unilateral effects theories." The judge specifically asks both sides provide a "detailed analysis of the legal framework to be used in analyzing unilateral effects claims." Not surprising, Steve Swasey, a spokesman for PeopleSoft, which has strenuously opposed Oracle's hostile takeover bid, took a similar view. "We think the government put on an especially strong body of evidence showing ... how this would harm customers," Swasey said. "The judge is doing a thorough analysis of all the testimony and all of the exhibits." At Wednesday's analyst day, Oracle executives had little new to say about their ongoing struggle to buy PeopleSoft, but sounded confident when asked about their chances of beating the government's antitrust suit. Co-president Safra Catz drew a laugh when she mentioned that Oracle often retains senior executives when it acquires other companies: "But that won't be true of one acquisition that you can probably guess," she said, referring to PeopleSoft CEO Craig Conway, a bitter opponent of the takeover. Department of Justice representatives were not immediately available for comment. The judge will hold closing oral arguments on July 20; his verdict is expected in August or September.