Updated from 9:46 a.m.

PeopleSoft

(PSFT)

shares surged Friday as the software maker popped two surprises. First, it fired Chief Executive Craig Conway, who has led the opposition to

Oracle's

(ORCL) - Get Report

hostile takeover attempt, and then disclosed its just-concluded third-quarter, which some on Wall Street feared could be a disaster, will be stronger than expected.

The firing, effective immediately, "resulted from a loss of confidence in Mr. Conway's ability to continue to lead the company. All of these decisions received the unanimous vote of the independent directors," the company said.

Investors assumed that the termination means the company is now willing to negotiate with its rival; PeopleSoft shot up beyond Oracle's $21-a-share bid to close the day at $22.83, a gain of $2.98, or 15%. Oracle gained 62 cents, or 5.5%, to $11.90.

But PeopleSoft Director Skip Battle tried to play down those assumptions in a conference call. "The speculation that this has something to do with Oracle is just not right." Still, Battle and other executives on the call refused to discuss the $7.7 billion offer.

Even if PeopleSoft keeps up the fight, it has lost an important ally. In yet another surprising development on Friday, the Department of Justice said it won't appeal its defeat in a much-watched antitrust suit it filed to block Oracle's acquisition. The Department had argued that the merger would seriously damage competition in the market for business software, but a federal judge rejected that, saying that even a combined Oracle/Peoplesoft will face stiff competition from a host of other players, for example,

Microsoft

(MSFT) - Get Report

.

"While we disagree with some of the legal observations in the district court's opinion, the ultimate outcome rested on detailed factual findings that would appropriately receive great deference in the appellate process," said R. Hewitt Pate, assistant attorney general in charge of the Department's Antitrust Division.

In the wake of Conway's departure, PeopleSoft appointed Dave Duffield, its founder and chairman, as the new CEO. Duffield's views on the takeover are not known, but he was extremely popular within the company when he had a day-to-day role and is seen as easier to work with than the hard-driving Conway.

Oracle recently extended its $21-a-share offer and won a U.S. court ruling to proceed with its takeover. Friday's market reaction, which pushed PeopleSoft shares above $21, reflects the market's speculation that Oracle will raise that bid.

PeopleSoft's last two reported quarters were disappointing, but Chief Financial Officer Kevin Parker said the company rebounded strongly in the just-concluded third quarter. License revenue, he said, hit $150 million, roughly $20 million more than analysts had expected.

Even so, Sanford C. Bernstein analyst Charles Di Bona noted that $150 million represents a 6.5% year-over-year decline, and surmised that poor execution, rather than disagreements over Oracle, proved fatal for Conway. "This is not a growth company," he said in an interview. "Conway really screwed up with the acquisition of

J.D. Edwards

. He took two flagging companies and put them together to get a bigger flagging company."(Sanford C. Bernstein does not have a banking relationship with PeopleSoft.)

PeopleSoft acquired J.D. Edwards, a smaller vendor of software designed for manufacturing companies in 2002. The two companies operated as one for two and a half months during the year-ago quarter. That makes the just-concluded quarter the first one in which it is possible to make a meaningful year-over-year comparison of the beefed up PeopleSoft.

Not surprisingly, some analysts disagreed with the company line on Oracle. "It's got to be over Oracle," said Sheryl Kingstone of the Yankee Group. "You don't fire your CEO when you've just finished your best quarter of the year." As to license revenue being off year over year, she said: "The whole industry is down."

Steven Cohen, chief investment officer at investment firm Kellner DiLeo Cohen & Co., told

Reuters

that the decision to fire Conway increased the likelihood Oracle will prevail.

"I would say it's the oddest time I've ever seen to fire the guy who has been the chief architect of your defense," Cohen said. "If I had to come up with an explanation, the most sensible one is that they're going to give up the ghost."

PeopleSoft's statement made no reference to Conway's handling of the battle with Oracle, but said "all decisions with respect to Oracle's tender offer have been made on the unanimous recommendation of the transaction committee of the board."

Battle said "there is no smoking gun" in the firing, and added that Conway "was not fired for cause." That suggests there is no ugly accounting surprise of the sort that resulted in the ouster and subsequent indictment of

Computer Associates

(CA) - Get Report

CEO Sanjay Kumar last month.

He also noted that the board's five-member transaction committee consistently met to discuss Oracle's offer with neither CEO Conway nor CFO Parker present.

Conway has been defiant in his public statements rejecting the bid, and appears personally committed to its defeat. Soon after Oracle announced its initial tender offer in June 2003, he called Oracle CEO Larry Ellison "a sociopath."

PeopleSoft didn't reiterate its opposition to the offer, but remained upbeat about its business prospects. "We have had great success with both new and existing customers," the statement said. "Our performance demonstrates PeopleSoft's continuing competitive strength and ability to perform." Moreover, several executives on the call made reference to ongoing commitments to innovations and to the customer base, not exactly the kind of language they would use if they were contemplating surrender.

The company's recent performance has been disappointing. It missed targets in its last two quarters, narrowly in the first, and by a wider margin in the second, a miss Conway blamed on Oracle. "Our financial results in

the second quarter reflected the heavy media coverage of the United States of America vs. Oracle trial," he said. "Clearly it was the elephant in the room for our customers."

In a statement, new CEO Duffield said: "My priority is to build on the core values on which this company was founded. We will focus on technology innovation, a relentless commitment to our customers, and a renewed drive to keep PeopleSoft a great place to work for all employees." Duffield requested and was given a salary of $1 a year, and noted that he did not want to be granted any additional equity compensation this year.

Asked if he sees himself as an interim CEO, Duffield said, "I'm in this for the long haul."

As part of the management shake-up, PeopleSoft also named Parker and Phil Wilmington as co-presidents, while Aneel Bhusri was elected vice chairman of the board.

Some accounts put Conway's severance package at $10 million to $20 million, and because he was not fired for cause, he will likely get it.

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