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$9.4 billion attempt to buy rival software maker



isn't officially dead, but it's clearly now on life support.

Late Tuesday, the companies said they have been informed by the Justice Department that the staff of its antitrust unit wants to block the takeover. Although it's possible that heavyweights higher up the department ladder will overrule the staff and give the takeover a green light, lawyers familiar with the internal workings of the department say that doesn't happen very often.

"It would be unusual. The staff is coming in with a strong recommendation against it," said Paul Friedman, who co-chairs the antitrust group of the Washington D.C. law firm Dechert LLP. "But it would not be unprecedented," he added.

A final decision by an assistant attorney general is expected by March 2, according to PeopleSoft.

Meanwhile, Wall Street's reaction to the news was cautious. PeopleSoft stock was off 67 cents, or 3%, to $21.03 in heavy trading recently, while Oracle was up 30 cents, or 2.2%, to $13.71 on average volume.

Oracle, which recently raised its bid to $26 per share from $19.50 remained doggedly hopeful. "While no decision has yet been made, Oracle believes this merger will eventually be approved," the company said in a prepared statement.

Oracle's lawyer, James Rill, of Howrey Simon Arnold & White, said: "I have seen many instances in which the assistant attorney general's decision differed from that recommended by the investigating staff, including several instances during my three years as assistant attorney general. This process simply is not complete."

It's even possible that Oracle could pursue the merger by taking the Justice Department to court. In fact, CEO Larry Ellison said in a recently published interview he would do just that, after saying exactly the opposite last July.

There are other moving parts to this saga, too. Oracle also must convince enough shareholders to tender their shares or vote for its proposals, including the elimination of a poison pill, and candidates at PeopleSoft's annual shareholders meeting next month.

Still, odds are the deal is off.

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Where does that leave PeopleSoft? If you believe Trip Chowdhry of FTN Midwest Research, the company is in trouble. Chowdhry, one of the few analysts to say early on that Oracle would raise its bid to $26, said Wednesday that the stock is headed for the low teens. PeopleSoft's horizontal applications are simply too expensive for the marketplace, he said. (Midwest does not have a banking relationship with PeopleSoft.)

"I think PeopleSoft is buying back its own stock," he said, explaining the relatively small drop in share prices so far. "But that's just a temporary fix." (In January, the company's board authorized a $200 million buyback.)

Indeed, one hedge fund manager said he shorted PeopleSoft stock after Oracle sweetened its bid to $26 a share. "Management has been distracted, the first quarter is typically down, and PeopleSoft has a history of missing first quarters," said the manager, who asked to remain anonymous. Like Chowdhry, he thinks the stock could fall into the teens.

But several sell-side analysts said that even without the support of an Oracle offer, PeopleSoft's stock is not expensive. "It's one of the cheapest in the software group," said Richard Williams of Summit Analytic Partners. On a price-to-sales ratio, PeopleSoft is at 6.7, compared to an average of 3.4 for other comparable software companies, he said.

Similarly, Tad Piper of Piper Jaffray said in a note published Tuesday "we believe

PeopleSoft has upside potential whether or not the

Justice Department opposes Oracle's hostile takeover bid, and we would be buyers of the stock at current levels." (Neither Piper Jaffray nor Summit have a banking relationship with PeopleSoft.)

What happens to Oracle if all its energy on PeopleSoft proves to be for naught? Going after

other companies is a probable path.

"We expect Oracle to turn its sights to other independent application vendors of meaningful size," JMP Securities analyst Pat Walravens wrote in a note Wednesday. "There are a number of smaller suite vendors with strong products, hundreds of millions of dollars in revenue and thousands of customers that might make good acquisition candidates for Oracle." (Walravens has a strong buy rating on Oracle and his firm hasn't done any banking with the company.)

Walravens didn't name specific names, but Oracle hasn't been shy about admitting it has eyed companies such as

BEA Systems


. Most recently, Oracle President Chuck Phillips said the company was weak in the business intelligence field, and he planned to do something about it.

Other possible targets tossed around include

Lawson Software


, which makes enterprise resource planning software in the retail, government and health care sectors; supply-chain software makers

Manhattan Associates

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i2 Technologies




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; and privately held

SSA Global