Oracle and PeopleSoft Wait for Justice - TheStreet

Oracle and PeopleSoft Wait for Justice

As rumors fly, the DOJ's decision on the PeopleSoft/J.D. Edwards deal could be a deciding factor in Oracle's bid.
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A nameless bureaucrat in Washington could wellsoon decide the fate of

Oracle's

(ORCL) - Get Report

$6.3 billion attempt to take over

PeopleSoft

(PSFT)

.

By Monday, the Department of Justice mustdecide whether PeopleSoft's friendly acquisition of

J.D. Edwards

(JDEC)

needs more federal scrutiny. If not, the $1.75 billion deal will close on July 17, and that will likely mean game over for Oracle: PeopleSoft plus JDEC is simply morethan even a company as large as Oracle could digest efficiently, say industry and sell-side analysts who have watched the M&A drama unfold.

There are even trading floor rumors that OracleCEO Larry Ellison has already decided to pull theplug. "I'm hearing that Oracle is walking away from thePSFT/JDEC fracas," said Jay Somaney, a hedge fundmanager with TSG Capital Partners and a contributorto

Street Insight

.

Oracle denies those rumors and on WednesdayEllison will take center stage at the company's annualanalyst meeting, where he is expected to blastPeopleSoft CEO Craig Conway yet again, and perhapsraise his bid for Conway's company to $21 or $22 ashare.

Right now though, the real action is inWashington, D.C., where the feds last week askedOracle for more information about the competitiveimplications of the PeopleSoft acquisition. Thedeadline for a similar request to PeopleSoft isMonday.

It's not easy to predict what the JusticeDepartment will do. On the one hand, the softwareapplications market is highly fragmented, and it's notat all clear that the disappearance of J.D. Edwardswill change that appreciably. On the other hand,Justice has had a few weeks to issue a so-called earlytermination, and has not done so. "Every day theydon't, it makes it more likely that the department willask for more information," said Andy Klevorn, anattorney specializing in antitrust matters with Eimer StahlKlevorn & Solberg. A request by Justice would keep thedeal from closing, perhaps for months.

Window Closing

It is clear, though, that Ellison's options arenarrowing. To being with, his offer of $19.50 a sharefor PeopleSoft has only garnered about 11% ofoutstanding shares. Most analysts now think it's toolow, even though it represents a premium overPeopleSoft's current price of $17.64 a share.

"I'm hearing that he needs to go to $21 or $22 ashare," said analyst David Hilal of FriedmanBillings Ramsey. But if he goes much higher, he couldhave a problem closer to home. "Oracle shareholdersdon't want a bidding war," said Hilal, whose companydoes not have a banking relationship with eitherPeopleSoft or Oracle.

Some Oracle shareholders are worried already: "Isthis

the PeopleSoft merger going to be a catalystfor growth -- or a way for Larry Ellison to flex hismuscles. I think it's the latter," said Daniel Morgan,a fund manager with the Noble Financial Group. Why sonegative? "He's buying into a mature market. How muchgrowth is there in ERP

enterprise resourceplanning?"

A Big Bite

Digesting PeopleSoft would be tough enough forOracle. Mergers of technology companies, even friendly,tend to be difficult, says Elizabeth Roche, vicepresident of the Meta Group, an IT research company."But this feels like a recipe for disaster, at leastin the near term," she said.

Not only do the three companies have distinctcultures and technologies, J.D. Edwards has a customerset that would not be a major benefit to Oracle, saidJim Shepherd, vice president of AMR Research. J.D.Edwards' customers are relatively small, a plus forPeopleSoft, which is aiming at the mid-market, but aminus for Oracle, which is aiming at the high end.Moreover, many J.D. Edwards customers are locked in toolder IBM technology, including midrange AS 400computers that are not compatible with Oraclesoftware, said Shepherd.

However, Tad Piper of U.S. Bancorp Piper Jaffraysaid that because Oracle ultimately is interested inacquiring customers, as opposed to integratingproducts and technologies, a three-sided merger couldwork. "

Ellison could put it all together," Pipersaid. Piper Jaffray has a banking relationship withPeopleSoft, but not with Oracle.

Still, most people who have followed the fightthink that Oracle is likely to bail if forced toacquire J.D. Edwards along with PeopleSoft. "It's toobig a bite. PeopleSoft was a masterstroke; this wouldbe a reckless move," said Richard Williams of SummitAnalytic Partners. "He'll walk away."