In the end, "best and final" was neither.

Oracle ( ORCL - Get Report) on Monday announced a definitive agreement to acquire PeopleSoft ( PSFT) for $10.3 billion, ending the software industry's bitterest takeover saga.

Oracle will pay $26.50 for each PeopleSoft share, adding $2.50 to the price it previously called its "best and final" for a 10.6% premium to PeopleSoft's Friday close of $23.95. It's the most Oracle has offered for PeopleSoft's shares, surpassing the $26 that it bid earlier this year.

The transaction, which was approved by both companies' boards, ends a year-and-a-half of wrangling that saw the firing of PeopleSoft CEO Craig Conway and the courtroom rejection of government antitrust opposition. It is expected to close in January.

Shares of both companies ended higher, with PeopleSoft adding $2.47, or 10.3%, to $26.42, and Oracle jumping $1.35, or 10.2%, to $14.63.

Oracle, which earlier Monday said second-quarter earnings rose 32% to $815 million, or 16 cents a share, believes the PeopleSoft acquisition will add a penny a share to its pro forma fourth-quarter earnings and 2 cents a share to quarterly earnings in fiscal 2006.

In a conference call Monday, Oracle predicted earnings in its February quarter of 14 cents or 15 cents a share on revenue of $2.7 billion to $2.9 billion. Analysts were forecasting earnings of 14 cents a share on sales of $2.67 billion.

"This merger gives Oracle even more scale and momentum," Oracle said. "The real highlight of our most recent quarter was the 57% growth in our applications business, and this merger is going to make that applications business bigger and stronger."

While Oracle's triumph is a feather in the cap of CEO Larry Ellison, it opens a number of urgent questions about PeopleSoft, whose marketing and administration software is the gold standard among large U.S. corporations. One concern will be the loyalty of PeopleSoft's existing customers, whose willingness to pony up a rich stream of royalty and support revenue piqued Oracle's interest in 2003.

Speaking at a customer convention last week, Ellison repeated a pledge "to oversupport PeopleSoft customers" during the transition in an apparent effort to prevent defections to rivals like Germany's SAP ( SAP - Get Report). SAP rose $1.34, or 3.1%, to $45.

For PeopleSoft, the writing has been on the wall since Nov. 21, when about 60% of its shareholders tendered into Oracle's then-$9 billion hostile offer. Publicly, the company hung its hopes on both a traditional "poison pill" takeover defense and an unconventional customer rebate program designed to make a buyout prohibitively expensive.

Both strategies were the subject of now-terminated litigation that might easily have dragged on until the spring. Meanwhile, Oracle last month named a slate of four candidates for PeopleSoft's board, the first step in an end-around proxy battle intended to replace PeopleSoft directors at an upcoming shareholders' meeting.

PeopleSoft also faced a revolt among share owners who alleged the company was too vigorous in its resistance to the deal, breaching its fiduciary duty.

"After careful consideration, we believe this revised offer provides good value for PeopleSoft stockholders and represents a substantial increase in value from October," said Skip Battle, chairman of PeopleSoft's transaction committee of independent directors. "This has been a long, emotional struggle, and our employees have consistently performed well under the most challenging of circumstances."

In a televised interview Monday, Ellison said PeopleSoft management "came to us" in recent days to seek a friendly merger. The Oracle CEO predicted job cuts at both companies. "Clearly we don't need two CEOs. Clearly we don't need two CFOs," Ellison said.

The impact of the merger on the rest of the software industry is a matter of much debate, with some predicting the buyout will usher in a wave of consolidation among smaller players. Among those frequently named are BEA Systems , E.piphany and Chordiant .

Another potential M&A candidate, Siebel , fel 2 cents to $9.97 Monday after being downgraded by Deutsche Bank. The brokerage said the company appears to be losing both customers and market share to SAP.

For their part, Oracle executives vowed on their conference call to swear off big acquisitions until PeopleSoft is integrated. It defined those as buyouts exceeding $200 million.

Under the new agreement, Oracle's tender offer has been extended to Dec. 28. About 120.6 million PeopleSoft shares are currently tendered into the offer.

"This merger works because we will have more customers, which increases our ability to invest more in applications development and support," Oracle said in a statement. "We intend to enhance PeopleSoft 8 and develop a PeopleSoft 9 and enhance a JD Edwards 5 and develop a JD Edwards 6. We intend to immediately extend and improve support for existing JD Edwards and PeopleSoft customers worldwide."

Oracle's second-quarter earnings of 16 cents a share beat the Thomson First Call estimate by 2 cents a share. The company reported a 10% jump in overall revenue to $2.76 billion, beating forecasts of $2.64 billion.

In the quarter, Oracle said software license revenue rose 13% to $2.22 billion, while services revenue rose 1% to $533 million. New software license sales rose 14% to $971 million, including a 57% increase in new application sales. Second-quarter operating margin added 4 percentage points from a year ago to 41%.