The U.S. Department of Justice spent the better part of a year and millions of dollars trying to prove that Oracle's ( ORCL) acquisition of PeopleSoft would end, or at least limit, competition in the business software market. The feds lost, of course, and if you'd care to know why the DOJ was wrong, look no further than the nasty dogfights that have developed since the beginning of the year.Two of the largest software companies in the world -- Microsoft ( MSFT) and Germany's SAP ( SAP) -- launched efforts to woo disgruntled customers from the embrace of the Redwood City, Calif.-based giant, with deep discounts, technical support and other goodies. Meanwhile, Siebel Systems ( SEBL) and privately held NetSuite turned the tables on upstart software maker Salesforce.com ( CRM), each with a campaign to attract customers by lowering prices. Efforts to poach customers from a newly merged company happen all the time, and often without much success. "We're very skeptical when applications vendors announce programs to lure away customers after an acquisition," said Jim Shepherd, an analyst with AMR Research. Indeed, Shepherd dismissed Microsoft's play for Oracle customers "as not worth the paper it's written on." But for Shepherd and other analysts, SAP's move is a departure from its own practice and that of the industry in general. Rather than simply proffering cheap license agreements, SAP took the unprecedented step of offering support for a competitor's product and even bought a small company, TomorrowNow, which had been providing support to PeopleSoft customers. And SAP was careful to target the initial offer at the 2,000 or so companies that already use both SAP and PeopleSoft applications. Why go to the mat now? Simply put, the software business is shrinking, and companies are fighting to hold on to their share. Oracle CEO Larry Ellison put in bluntly a few months ago: "This is the recovery -- enjoy it." And there are signs that the environment is getting worse.
Consider the dollar. After sinking for months, the dollar has reversed course and is now up 5.5% against the euro this month. "Companies had the wind at their back," said Richard Williams, chief of software research at Garban Institutional Equities. "Now it's in their face." Although it's no secret, many investors and analysts don't seem to notice that substantial numbers of companies made their numbers only because the weak dollar aided both the top and bottom lines. Williams also pointed out that if President Bush can deliver on his promise to cut the deficit in half by 2009, software companies, among many others, will take a hit. "If your biggest customer suddenly gets a lot smaller, you have a real problem," he said.
At the coming-out party for
the newly launched "OracleSoft," Ellison dismissed SAP's stack as immature, saying confidently, "If they want a technology battle, that's one I want to fight." Until recently, SAP sold applications, but it has only recently developed its NetWeaver middleware as an alternative to the stacks of Oracle and IBM ( IBM). For its part, Oracle has pledged to support PeopleSoft applications until 2013 and has promised to have new versions of those applications ready during 2006. Ellison figures he can retain all but about 5% of PeopleSoft's customers. That may be too optimistic. Piper Jaffray analyst Tad Piper figures that attrition likely will be about 10%. Even so, he said he is comfortable with his expectation of a profit of 81 cents a share in fiscal 2006. (Piper's estimate includes PeopleSoft's earnings, while the lower First Call consensus does not. His company does not have an investment banking relationship with Oracle.) The software sold by Oracle and SAP is far too complex to be considered a commodity -- at least for now -- but that's less true of the simpler software sold by Salesforce.com to automate customer-related tasks. And that means price is becoming a decisive factor in making sales. Although Salesforce is clearly the leader in "on demand" software of this type, rivals Siebel and NetSuite are circling. NetSuite for example is offering its NetCRM application to certain Salesforce customers and prospects at half the price charged by its rival, said JMP Securities analyst Patrick Walravens. And Siebel, he said, is willing to sell its on-demand software at a loss in order to protect its core business. It's far too soon to know how well Oracle will manage the complex task of integrating a very large purchase while fending off rivals such as SAP. But it's not too soon to say that while the cards in the software deck may have been shuffled by Oracle, it's still the same old bloodthirsty game.