PeopleSoft Turns Its Back Again

Rejecting Oracle's latest $24-a-share offer means shareholders will decide the merger's fate.
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Updated from Nov. 10

Saying the company is worth more than $24 a share,

PeopleSoft

(PSFT)

on Wednesday rejected

Oracle's

(ORCL) - Get Report

latest takeover bid, leaving the resolution of the 17-month struggle in the hands of institutional shareholders.

When informed of PeopleSoft's decision, Oracle CEO Larry Ellison said again that if a majority of shareholders have not tendered their stock by midnight on Nov.19, his company will walk away. "Oracle has been at this for a year and a half and it is now time to bring this matter to a close. On November 19th, we will respect the will of the shareholders," he said in a prepared statement.

But shareholders may have to wait until spring to really have the last word. PeopleSoft Co-President Kevin Parker called the tender offer "a nonbinding straw poll," and said his company would fight until PeopleSoft's next shareholder meeting in the spring.

PeopleSoft said it communicated the unanimous decision of its directors in a phone call to Oracle, whose latest offer is valued at $8.8 billion.

"We reiterated that, as members of the board have testified in Delaware, we would be willing to discuss an offer made by Oracle at an appropriate price -- but $24 isn't it," PeopleSoft said.

Oracle executives had expected the rejection, one of many since the struggle began in June 2003, and have already begun a road trip to convince the major shareholders to vote their way. They will focus on approximately 30 large funds that control a majority of PeopleSoft's shares, CFO Harry You said at a conference hosted by Goldman Sachs.

Oracle's success in acquiring PeopleSoft hinges on institutional shareholders because they comprise between 70% and 80% of PeopleSoft's float. Insiders, meanwhile, hold about 7% to 10% of the company.

The most recent tally of tendered shares, released by Oracle last month, showed that only about 5% of PeopleSoft shareholders had offered up their stock. But speaking privately, one Oracle executive said the company doesn't expect many large institutions to tender their shares until the last minute. Large shareholders, he said, are loath to lock up their shares for any more time than necessary, a contention that several independent M&A experts agreed with.

As the fight moves into the end game, the main issue appears to be price.

Oracle CEO Jeff Henley said, "We believe our offer represents a substantial premium over PeopleSoft's standalone value now or in the foreseeable future. We leave it to PeopleSoft's shareholders to decide whether PeopleSoft's current management can deliver better shareholder value now, or within any reasonable investment horizon."

But PeopleSoft board member George "Skip" Battle said, "We told Oracle that its price must reflect both PeopleSoft's intrinsic value and the fact that PeopleSoft is materially more valuable to Oracle now than it was when Oracle made its inadequate $26 per share offer."

Marty Shagrin, a software analyst with Victory Capital Management in Cleveland, Ohio, said his firm hasn't yet decided whether it will tender its shares but he believes it's a move that makes sense.

"Our overall view is that this is a pretty fair price and the software industry does need to consolidate, and this is probably a smart transaction from both sides," said Shagrin, whose firm holds PeopleSoft shares in an index fund and separately managed accounts.

Shagrin noted that the $24-a-share price tag is more than 20 times 2005 earnings -- not a peak or trough valuation. In fact, it's a multiple of 31 times the consensus estimate of 77 cents a share for 2005 earnings, as gathered by Thomson First Call. And it's still 27 times the highest analyst estimate of 87 cents a share.

In making a case for rejecting Oracle's bid, PeopleSoft noted that at $24, the price is only 22 times the 2005 earnings forecast, calling that "well below PeopleSoft's historical average trading multiple and the current average 2005 P/E multiple of other leading enterprise software companies."

If Oracle fails to get a majority of PeopleSoft shares tendered by the Nov. 19 deadline, Shagrin said he wouldn't be surprised to see the stock trade back down to the teens, where it sat before the soap opera with Oracle began.

Greg Taxin, CEO of proxy advisory firm Glass Lewis, said that PeopleSoft's "poison pill" anti-takeover provision means that if Oracle actually bought a substantial number of tendered shares, the total number of shares outstanding would be greatly diluted, making the acquisition impossibly expensive. "Sadly, the shareholders are at the mercy of PeopleSoft's board, which, so far, has not shown a willingness to negotiate." Their only remedy is to vote for a new slate of directors, he said.

A lawsuit by Oracle to void the poison pill is currently under review by a judge in Delaware who has not indicated when he will render a verdict.

Shares of PeopleSoft were recently off 52 cents, or 2.3%, to $22.27 in early Thursday trading.

PeopleSoft also issued guidance for 2005 for the first time. PeopleSoft said it expects pro forma earnings excluding charges of $1.05 to $1.10 a share and GAAP earnings of 82 cents to 87 cents a share on revenue ranging from $2.8 billion to $2.9 billion, including license revenue of $640 million to $655 million. That's considerably higher than the consensus GAAP earnings estimate of 77 cents a share from Thomson First Call, but the midpoint falls short of the $2.88 billion in sales forecast by analysts.