As the Justice Department's antitrust trial against
crosses its midpoint, some sell-side analysts believe Oracle has emerged in an unexpectedly strong position. But legal experts underscore the fact that the trial's outcome is hardly clear cut.
This week, the Department of Justice called its last witness in its suit to block Oracle's $7.7 billion hostile takeover of
, and Oracle began arguing its side of the case. Now in its third week, the antitrust trial under way in federal court in San Francisco is expected to end late next week. A decision by Judge Vaughn Walker is expected in August or September.
"The DOJ's case was surprisingly weak," Pacific Crest analyst Brendan Barnicle declared in a note Tuesday. "Oracle fared extremely well during the DOJ portion, and Oracle is in a good position to build on its arguments with witness testimony over the next two weeks."
Barnicle noted how even the DOJ's own witnesses suggested that the players in the enterprise applications market extend beyond just
, Oracle and PeopleSoft.
The definition of the market is a
crucial issue in the case. The DOJ maintains the market in question is high-end financial and human relations software serving large companies, and that the three companies are the only major players. Consequently, Oracle acquiring PeopleSoft would reduce the market to a duopoly and reduce competition, hurting customers, the government argues.
Oracle has countered the government's definition is arbitrary, claiming the software market is broader and consequently includes more players.
In the first phase of the trial, Barnicle noted, PeopleSoft executives testifying on behalf of the DOJ acknowledged in cross-examination that PeopleSoft competed against and sometimes lost large enterprise deals to other players such as
In addition, Richard Knowles, vice president of operations for SAP America, testified Wednesday that "the only thing we anticipate is the same level of competition we face today, if not greater," even if Oracle were to ultimately acquire PeopleSoft.
"It is increasingly likely that Oracle will prevail in this trial," Barnicle concluded, an outcome he believes could put some pressure on Oracle shares. Still, the analyst maintains an outperform rating on Oracle with a 12-month price target of $18. (His firm has not done any investment banking with Oracle.)
However, any strength in PeopleSoft shares based on speculation of an Oracle trial victory could be premature, he said, suggesting the takeover target will need to lower its guidance for the second half of the year before the judge issues an opinion.
Taking a similar, but less direct, view as Barnicle, American Technology Research analyst Donovan Gow wrote Tuesday: "After more than two weeks of testimony, it is becoming increasingly clear that the DOJ's case against ORCL is not the sure bet that many investors thought it would be."
Gow cited testimony from
partner Christy Bass and internal PeopleSoft documents portraying
as a serious threat in the enterprise market.
The trial remains a very close fight, Gow acknowledged, but he believes that if Oracle can continue to score points -- or just hold even -- the possibility of an Oracle victory could drive PeopleSoft's stock to the $21 bid. (Gow has a buy rating on PeopleSoft; his firm doesn't do investment banking with the company.)
Recently, PeopleSoft shares were up 31 cents, or 1.7%, to $18.98 while Oracle shares were higher by 36 cents, or 3.2%, to $11.52.
Some legal observers, meanwhile, take another view.
"My sense is the government's case appears to be getting stronger and stronger," said Robert Doyle, an antitrust lawyer with Sheppard Mullin Richter & Hampton in Washington, D.C.
The Legal View
Doyle, who is receiving daily notes from a legal research assistant attending the trial, believes the government's customer witnesses are successfully helping the judge understand the difference between the midlevel and high-end software markets.
Olev Jaakson, the legal assistant attending the trial for Doyle's firm, agreed the DOJ is still ahead. "Oracle's counsel has often pointed
out holes in
the DOJ's argument," he acknowledged. "But a lot of the things they point out are select examples and often not the whole story, and the DOJ will reach back to the same document and give context."
Jaakson also believes Judge Walker is pleased with the caliber of the customer witnesses called by the DOJ, noting that he has referred to them as being knowledgeable and sophisticated. The DOJ "has definitely established that all these customers distinguish between two separate markets, even if they don't use the term 'high-function,'" he added, referring to the DOJ's definition of the market.
Microsoft, whose head of business applications testified on behalf of the DOJ Wednesday, may not figure as largely in the case as some suspect, Doyle suggested. That's because Oracle plans to call another Microsoft executive who is expected to testify that the world's largest software market is likely to enter the high-end market.
Rather than evaluating the credibility of each executive, the judge may just decide each cancels the other out and decide not to consider Microsoft a factor, Doyle said.
Although both sides are quibbling about the market definition, an Oracle-PeopleSoft merger would undeniably combine two of the largest players and it's hard not to see some competitive effects as a result, added Stern School of Business Professor Nicholas Economides, who specializes in antitrust and public policy issues.
"Oracle, in my opinion, will have a hard road in front of them proving there are no anticompetitive effects whatsoever," he said. "The case is in principle difficult for Oracle to prove, and Oracle will have to talk very extensively about the intricacies of the markets."
Conversely, George Mason University antitrust law professor Ernest Gellhorn believes the DOJ faces an uphill battle because, to borrow Oracle's charge, its market definition looks a little "gerrymandered."
"I think he
Judge Walker will look upon a novel market definition with great care and skepticism," Gellhorn said, noting the Supreme Court has made it clear that how businesses define the market in question should be a consideration. "The government faces a rigorous task in showing this
definition is recognized by the industry
and the market definition is the beginning and ending of the case."
Of course, it won't be clear whose market definition has been more persuasive until the judge issues his much-anticipated opinion, likely within the next two months.