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Oracle, DOJ Mull Their Next Moves

Analysts see a higher bid for PeopleSoft and a possible appeal after antitrust objections are rejected.

Updated from 9:51 a.m. EDT


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court victory Thursday over the federal government's attempt to prevent its hostile takeover of



has Wall Street assessing how much of the battle remains.

Early returns on the stunning Justice Department defeat were bullish, with many analysts expecting a sweetened bid. PeopleSoft predictably rallied toward the $7.7 billion offer's $21-a-share takeout price. Oracle also rose, as many Wall Street analysts argued that the deal as constituted would be an immediate boon to its earnings.

In recent trading, PeopleSoft was up $1.63, or 9%, to $19.58, while Oracle jumped 50 cents, or 5%, to $10.43.

Notably, a handful of second-tier software companies, including

Business Objects






BEA Systems


, were also higher on collateral takeover speculation.

Goldman Sachs analyst Rick Sherlund said that at the very least, the merger would add "a few cents per share" to Oracle's net income. But If Oracle follows through on its intention to cut out about $1 billion of PeopleSoft's cost structure and "basically milk the maintenance revenue stream, we estimate this would be more significantly additive to earnings at the current $21 offer price," Sherlund said.

Tad Piper of Piper Jaffray said: "The acquisition of PeopleSoft could potentially drop close to $780 million in calendar 2005 pro forma net income to Oracle's bottom line. With 5.22 billion shares outstanding, this would be equivalent to 14 cents in calendar 2005 EPS for Oracle, or potentially 75 cents a share vs. current estimates of 61 cents a share."

After a month-long trial that ended in late June, U.S. District Court Judge Vaughn Walker on Thursday evening rejected Justice Department arguments that Oracle's hostile merger offer would unfairly damage competition in the market for enterprise software.

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His 164-page decision found that the government had not proved that a high-end enterprise software market "exists as a separate and distinct line of commerce." Walker also said the government never proved that the relevant market excludes Europe, where German software giant


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is dominant.

Shortly after the verdict, R. Hewitt Pate, assistant attorney general in charge of the department's antitrust division, said that "the department is considering its options."

Pate went on to say in a press release: "We are disappointed in the court's decision. We believe the facts and evidence in this case support our position that Oracle's proposed acquisition of PeopleSoft would result in a substantial lessening of competition in the markets for high-function human resources management and financial management systems software."

Oracle quickly made it clear that it will aggressively pursue the acquisition, and called for a meeting between the two companies.

"This decision puts the onus squarely on the board of PeopleSoft to meet with us and to redeem their poison pill so that the shareholders can accept our offer," said Oracle Chairman Jeffrey O. Henley.

PeopleSoft said Thursday that its board will review the implications of Thursday's ruling, but reiterated that the board has "carefully considered and unanimously rejected each of Oracle's offers, including its current offer of $21 per share."

However, PeopleSoft CEO Craig Conway, who has been outspokenly hostile to the takeover, sounded on Friday like he had plenty of fight left in him. "While this ruling will receive extensive press coverage, it is really only another chapter in this ongoing saga. Most importantly, today's ruling does not mean that Oracle will acquire PeopleSoft," he said in a letter to employees.

But the pressure to hold a meeting started to build almost immediately. "The premium is a very significant one to where

PeopleSoft would trade in the absence of this bid. It's time the board came to its senses," said Steven Cohen, of Kellner DiLeo Cohen & Co., a hedge fund with a position in PeopleSoft.

"PeopleSoft's board has used an array of excuses and deflections to avoid that meeting. Time is up on that," said Greg Taxin, CEO of Glass Lewis & Co., a proxy advisory service. Oracle and a group of shareholders are already suing PeopleSoft's board, demanding that it set aside its poison-pill defense. Should the board remain obstinate, more litigation and a serious challenge at the next shareholder meeting are likely, Taxin said.

On June 5, 2003, the day before Oracle originally announced its bid, PeopleSoft was trading at $15.11 a share, which means the offer represents a premium of 39% to that price. When it appeared that Oracle had been outmaneuvered, prices dropped below $17. At one point the offer was $26, and if it takes that much to win, cash-rich Oracle could handle it easily.

Although Thursday's ruling removes a major obstacle to the takeover, it is far from a done deal. The European Union is investigating the proposed merger, PeopleSoft has a strong poison-pill defense in place, and an appeal by the Justice Department is possible.

A senior Justice Department official would say only that the government is "considering its options," but legal experts believe there is a strong possibility the government will appeal the case to the liberal-leaning Ninth Circuit Court of Appeals in San Francisco.

Paul Friedman, co-chair of the antitrust group of the Washington, D.C., law firm Dechert LLP, called Walker's decision "very thoughtful," and if the government should appeal his ruling, "they will have a difficult mountain to climb."

Ernest Gellhorn, who teaches antitrust law at George Mason University Law School, said he was not impressed with the government's overall argument, and on one crucial issue -- whether a beefed-up Oracle would have the muscle to force higher prices on the market -- "the evidence was feeble," he said.

Still, Tate and the Justice Department don't want to see the ruling stand as a precedent, and they have "a good deal of emotional capital invested. They want a return," Gellhorn added.

And perhaps most importantly, the Ninth Circuit Court of Appeals is a good venue for the government. "I can think of at least three judges who would rule their way hands down," Gellhorn said. Of course, it's not at all clear which of the 24 or so active judges on the court would be selected.

Should the appeal happen -- and the government has 60 days to make up its mind -- the court would likely hand down a decision within several months, Friedman said.

PeopleSoft noted in its press release Thursday that the company is still fighting Oracle in a separate suit that claims Oracle engaged in unfair business practices. PeopleSoft is claiming compensatory damages of more than $1 billion plus punitive damages. The case goes to trial Nov. 1.