Remember the last time you bought a used car? If you do, the latest round of news out of Delaware, where
are once again locked in a legal duel, should be very familiar.
Both sides are using the trial, which will decide if PeopleSoft must discard its antitakeover measures, as a forum to engage in some very public negotiations. Although everybody is under oath, savvy investors know better than to take much of what they're hearing as the literal truth.
"It's obvious that negotiations are now being conducted in public," said Tony Ursillo, an analyst with Loomis Sayles & Co., which holds Oracle shares.
At the moment, there's some sentiment that Oracle will slightly raise its $21-a-share offer, if that's what it takes to get the deal done, no matter what executives of the database giant say in public (as Oracle CEO Larry Ellison stated in court last Friday).
But this is a very tough one to handicap. Hostile takeovers rarely occur in technology, much less in the software sector, so there's little historical data to help make a call. To be sure, some analysts believe that PeopleSoft has blown it, and is so weakened by the 16-month fight that it may be forced to sell at an even lower price.
Oracle, playing the role of tire kicker to the hilt in the last few days, is doing everything it can to poormouth the stock, calling the company "damaged goods" and
trotting out its top executives to say that the offer is more likely to go down than up.
No surprise, says analyst Patrick Mason of Pacific Growth Equities. "Oracle wanted to pop the bubble" that had pushed the stock to an intraday high of $23 after PeopleSoft fired Craig Conway on Oct. 1. (Pacific Growth Equities does not have an investment banking relationship with either Oracle or PeopleSoft.)
The stock has drifted downward since then, partly on profit-taking and partly on fears sparked Friday and again on Monday when Oracle CEO Larry Ellison and then co-President Safra Catz said they may lower the offer price.
The Saga Continues
One buy-side investment manager, who asked not to be quoted by name, put it bluntly: "Oracle wants to terrorize PeopleSoft shareholders into selling. They're using this opportunity to play hardball and knock down the stock. I don't blame them a bit," the manager said.
Even so, the manager said he figures the final price is likely to be a bit higher than $21. "It might be just cosmetic, but it would let PeopleSoft show its shareholders it got something for them." Ursillo agrees, saying he figures "if a deal gets done, it will likely be somewhat above $21."
PeopleSoft, meanwhile, isn't above playing its own game. Director Steven Goldby first signaled that talks were a possibility during his testimony last week. He said his company would be willing to discuss a merger if the price was right and there was a "high certainty" that the deal could close quickly.
But on Tuesday, PeopleSoft extended its so-called customer assurance program, which Oracle is suing to remove. Essentially a money-back guarantee to new customers, the program gives companies that sign new contracts with PeopleSoft the right to ask Oracle to pay them as much as five times the purchase price if Oracle cuts off support to the products after the takeover is completed. Oracle estimates that the program could add as much as $2 billion to the purchase price.
Subsequently, PeopleSoft CEO David Duffield, who resumed his role
after Craig Conway was fired, said during a deposition taped in August but played in court Tuesday that even $26 was too low, in the opinion of the company's investment advisers.
However, Wall Street is also starting to focus on the role of PeopleSoft's board -- and not everyone is convinced that it has done a good job for shareholders during the M&A brawl. "The offer was $26 a share at one point, and now it's at $21 and could go lower. Connect the dots," said Steven Cohen, chief investment officer at investment firm Kellner DiLeo Cohen & Co.
When Oracle launched the takeover attempt in June 2003, it initially offered $16 a share and quickly raised the price to $19.50, and then $26. By May 2004, PeopleSoft's shares were about $7 below the offering price, and Oracle cut its offer to $21. At every step along the way, PeopleSoft rejected the offer and refused to even meet with Oracle. Conway, a one-time Oracle executive, seemed to take the fight very personally, once calling Oracle a "sociopathic" company.
Moreover, PeopleSoft is in a much weaker position than it was a year ago. Its best defense, the argument that the merger would be blocked on antitrust grounds, is out the window unless the European Union surprises everyone by vetoing the deal. A U.S. District Court judge in September ruled against a suit brought by the U.S. Department of Justice.
Investors have watched PeopleSoft put together a string of bad quarters and then fire CEO Craig Conway for allegedly lying to Wall Street, saying that Oracle's pursuit has not damaged his company's ability to win new business.
PeopleSoft did preannounce that its September quarter will be better than expectations, but stacked up against a year's worth of negatives, the good news isn't likely to offset the growing pressure to cut the best possible deal.
FTN Midwest Analyst Trip Chowdhry, one of the few people on Wall Street to stick his neck out by predicting that Oracle would raise its bid to $26, now thinks the offer will go below $21 a share. "PeopleSoft's business is not worth as much to Oracle as it was 16 months ago," he said. (Midwest is seeking investment banking business from companies mentioned in this story.)
Chowdhry cites the worsening IT spending picture and nascent, but growing, competition from hosted application vendors beginning to put pressure on the price of traditional applications. He also notes that some customers are forcing software vendors to renegotiate costly maintenance agreements, a source of ongoing revenue. If Chowdhry is right and PeopleSoft's maintenance stream is slowing, Oracle will certainly need to pay less for its rival.