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PeopleSoft Agrees to Oracle Takeover

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Last Monday, Oracle Corporation and PeopleSoft ended their 18-month takeover battle with an agreement that let both vendors declare themselves the victors. Under the agreement, PeopleSoft will be acquired by its rival at a price of $26.50 per share, a 10% premium over Oracle's former "best and final" offer of $24 per share. The agreement sets PeopleSoft's price tag at a hefty $10.3 billion, leaving Oracle with the considerable challenge of generating a return on its investment.

In a hastily arranged conference call with analysts, Oracle CEO Larry Ellison revealed that PeopleSoft had provided evidence that its maintenance revenues were higher and its operating expenses lower than Oracle had estimated. This enabled the two firms to agree to the higher acquisition price and close the deal in negotiations that took place during the weekend before the announcement. By acquiring PeopleSoft, Oracle will inherit more than 12,000 new customers, become the second largest enterprise software vendor in the world (next to SAP), and become North America's largest provider of core business solutions.

While Oracle may have won the acquisition war, it faces a new battle to squeeze every possible drop of value out of its $10.3 billion investment. That will require it to lay off thousands of employees and slash departmental budgets. While the company has not made definitive statements about workforce reductions, it could lay off at least half of PeopleSoft's employees over the coming year. Many of the cuts would likely come from PeopleSoft's marketing and sales teams, as Oracle does not intend to market the vendor's product lines to new customers.

At the same time, Oracle does intend to support and in some cases enhance PeopleSoft products. To do that, Oracle will try to keep many of PeopleSoft's senior software engineers and support managers on the payroll. It will also try to keep some PeopleSoft account managers on board to sell upgrades and additional modules to existing customers.

What the Future May Hold

Should Oracle successfully retain PeopleSoft's brightest developers, it will harness their talents to bring the two vendors' product lines together over a period of several years. While the actual details of the convergence are unclear, here is what Oracle is saying about its plans for PeopleSoft's application suites.

  • PeopleSoft Enterprise, the flagship product for large companies, may receive many or most of the enhancements that PeopleSoft had planned for it. Oracle has stated that it will roll out a new version of the product--PeopleSoft Enterprise 9--in one to two years. Once that occurs, Oracle intends to build a new version of its own ERP product--E-Business Suite--that is a superset of that product and the most valuable features of PeopleSoft Enterprise 9. This would become the "convergence platform" for the two product lines.
  • PeopleSoft EnterpriseOne, the former J.D. Edwards solution known as J.D. Edwards 5, could get much the same treatment as PeopleSoft Enterprise. Oracle has said that it will make targeted improvements to EnterpriseOne over the next one to two years and release a new version that Ellison calls "J.D. Edwards 6" during that time frame. Oracle would then incorporate the best features of this new version into the next release of its E-Business Suite and designate it as the migration path for EnterpriseOne users.
  • For the thousands of PeopleSoft World customers who rely on IBM's iSeries, the future remains unclear. In recent weeks, Oracle has stressed that it will support the product. However, the vendor admitted that its ability to deliver support would depend on the cooperation it receives from IBM. Oracle has experience supporting customers on many non-Oracle products, including customers that use IBM's DB2 database. However, it is doubtful that Oracle has ever supported the iSeries version of DB2, upon which World relies. As such, IBM's assistance will be critical to Oracle and its newly acquired World customers.

It is difficult to predict how IBM will respond to the PeopleSoft acquisition because its relationship with Oracle has historically been marked more by competition than cooperation. While IBM's Global Services Division installs and integrates millions of dollars of Oracle products every year, Oracle is also one of IBM's greatest software rivals. This rivalry could make it difficult for some IBM groups to assist Oracle in supporting World customers. However, if IBM fails to provide adequate assistance, it could create a poor support environment for World customers as well as for the many EnterpriseOne customers who rely on IBM software and the iSeries. That could lead many of those customers to migrate to alternative enterprise applications over time, and many of those alternatives may not run on the iSeries.

In short, the PeopleSoft acquisition poses serious challenges for IBM, Oracle, and the iSeries customers that are caught between the two vendors. To protect its interests with PeopleSoft's iSeries customers, IBM will have to cooperate with a vendor that it largely distrusts. While Oracle may want to wean PeopleSoft customers off IBM's middleware over the long term, it must ironically cooperate with Big Blue in the short term to support PeopleSoft's customers on that middleware and the iSeries. If it fails to do so, it could lose those customers and a big chunk of the maintenance revenues that it needs to recoup its $10.3 billion investment.

It is far too early in the game to say how the two industry giants will handle these challenges. However, there are some steps that PeopleSoft's iSeries customers can take to protect their own interests and, in the process, influence the behavior of both Oracle and IBM. I'll talk about those steps in future issues, so stay tuned.

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology. You can reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..

LEE KROON
Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology.
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