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Oracle Posts Exit Sign in Hostile Bid

A court filing Monday indicates the database giant is looking for a way out of the PeopleSoft deal.
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Larry Ellison's hostile bid to take over

PeopleSoft

(PSFT)

is on life support and

Oracle's

(ORCL) - Get Oracle Corporation Report

combative CEO is likely preparing a graceful end to the fight.

"Oracle wanted to snap up a good revenue stream for a cheap price -- but it didn't happen," said Richard Williams of Summit Analytic Partners. "Now they're looking for an exit."

The $7.3 billion offer has been on shaky ground for months as PeopleSoft outmaneuvered and outsmarted Oracle, pulled off what looks to be a smooth integration with its own acquisition, J.D. Edwards, along with several winning quarters. Its most effective counterstroke might have been the guarantee it made for huge refunds on software contracts if the company were taken over by Oracle. Simply put, the database giant badly underestimated the strength of PeopleSoft and its management team.

Although Oracle still says "we remain committed to the acquisition," on Monday the database giant said in a court filing that: "If the PeopleSoft board is permitted to continue to issue self-serving, entrenchment-motivated contracts under the revised money-back offer, Oracle may be forced to abandon its bid as it will no longer be economically viable."

That admission may be long overdue.

When Oracle made its initial offer -- $5.1 billion or $16 a share, on June 6, PeopleSoft was trading at $15.04 a share. Now it's trading at $21.64, well above Oracle's latest offer of $19.50 and talk on Wall Street on Tuesday was beginning to focus on the future of Oracle and PeopleSoft as separate companies.

"We think it would be an overall positive for ORCL shareholders if the company abandons its $7.3Bbid for PSFT," Prudential Equity analyst Brent Thill said in a note to clients. Although the end of the struggle will remove the floor of $19.50 under PeopleSoft's stock, Thill added that "We think investors will focus on PeopleSoft's continuing business momentum."

And Oppenheimer analyst Sanjiv Hingorani headlined his note "Win-Win With or without Oracle's Bid."

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(None of the analysts quoted above work for a company that has a banking relationship with either Oracle or PeopleSoft.)

It's possible, of course, that the court will force PeopleSoft to withdraw the offer and relieve Oracle of an obligation that could run as high as $800 million. If so, the next hurdle could be even higher -- the Department of Justice has yet to OK the deal, and is examining it to see if the combined companies would pose a serious risk to competition in the enterprise application market. A determination is expected by the end of the calendar year.

It's also possible that PeopleSoft will fall on its face in an upcoming quarter. There has been suspicion on Wall Street that PeopleSoft has done a masterful job of pulling business in to keep its share price up. But at some point, if the skeptics are right, the company will run out of deals.

Charles DiBona of Sanford Bernstein, one of the few analysts who have been skeptical of PeopleSoft's aggressive outlook for fiscal year 2004, has maintained an underperform rating on the company's stock and wonders if a blowup isn't in the works.

Even so, it's clear that Ellison, who sees himself as a modern-day samurai and is fond of quoting

The Art of War

, has been outgeneraled by PeopleSoft CEO Craig Conway, a one-time Oracle executive.

"Conway made three brilliant moves," said Williams. "The money-back-guarantee, his mobilization of people power, and completing the JDEC acquisition in a hurry."

In fact, two of those moves were a direct response to Ellison's biggest mistake -- appearing to play the bully. No matter what the fine print says, the market perceived Ellison's opening gambit as a signal that Oracle would buy PeopleSoft, and then kill it, forcing the customer base to migrate to Oracle applications. Whether customers like Oracle or not, switching major application vendors can be nightmarish, and the thought of doing so panicked many customers.

After a thorough bashing in the trade press, and in meetings with PeopleSoft customers, Oracle pulled back (or clarified its position, as the company claims) and said it would not only support current PeopleSoft customers, it would support them for longer than PeopleSoft would.

Meanwhile, PeopleSoft's guarantee that it would pay customers anywhere from two to five times the price of their software costs, did its work. Customers stayed loyal and new ones signed up at a rate that surprised Wall Street.

Even worse, from Oracle's point of view, PeopleSoft completed its acquisition of J.D. Edwards before the takeover bid could gain much momentum -- and did it well.

"They put the naysayers on the defensive (at a recent customer gathering) by showing the world they can integrate PeopleSoft and J.D. Edwards applications very succesfully," said Trip Chowdhry of Midwest Research. (Midwest does not have a banking relatiohship with either company.)

Moreover, JDEC revenue makes it easier for PeopleSoft to make its numbers, making a bad quarter less likely, at least in the short run. It's not easy for analysts to distinguish organic growth from growth derived from JDEC, and PeopleSoft management has not made that task any easier.

Chowdhry, who has been a fan of the acquisition since the beginning, believes it may not be entirely dead -- but hibernating for a better time. "Ellison has to make up his mind -- is he willing to pay $26 a share? If not, it is over," Chowdhry said.