OS/400 Shops in Limbo During Oracle-PeopleSoft Fight
September 27, 2004 Timothy Prickett Morgan
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PeopleSoft held its annual Connect user conference in San Francisco last week, and Craig Conway, the company’s chairman and CEO, used his keynote address to fire up the 15,000 attendees and get them behind his company as it continues to fight the hostile takeover from rival Oracle. During the show, PeopleSoft announced a five-year, $1 billion partnership with IBM, which is clearly aimed at making PeopleSoft less attractive to Oracle and better able to fend off the company’s advances. 
Conway started his keynote with some dark humor that went straight to the heart of the matter. “Have you ever had a bad dream that would not end? We have, and ours has been going on for 15 months.” The crowd erupted into laughter and applause. They, like Conway, PeopleSoft’s employees, and its partners, are living this nightmare right alongside him. And to be honest, customers of the former J.D. Edwards have had two nightmares since PeopleSoft announced its bid for JDE and then Oracle retaliated with its hostile offer: the first being what PeopleSoft would do, and the second being what Oracle might do. As we reported two weeks ago, PeopleSoft has done a pretty good job of absorbing JDE’s OneWorld and World ERP suites, which are now called EnterpriseOne and World. So that nightmare has ended, more or less, except for some complaints about higher maintenance costs (this always happens after an acquisition). The question now is what will Oracle do with the JDE suites if it prevails in its hostile takeover? United States District Court Judge Vaughn Walker, of the Northern District of California in San Francisco, ruled two weeks ago that Oracle could proceed with its takeover and that the injunction against the acquisition sought by the Department of Justice on antitrust grounds would not be granted. PeopleSoft has not said much about its legal plans, but the Justice Department can appeal the ruling to the Ninth Circuit Court of appeals within the next two months, and if it loses there, it can ask for the ruling to be heard by the Supreme Court. Meanwhile, PeopleSoft’s own $1 billion civil lawsuit against Oracle in Alameda County Superior Court, which was due to start on November 1, was pushed out until January 10, 2005, as Oracle asked for more time to do document discovery and was granted the request by Judge Ronald Sabraw. On the other side of the Atlantic, it is unclear what Mario Monti, the antitrust commissioner for the European Union, will do. The EU has scuttled a number of high-tech mergers on anticompetitive grounds in recent years, but Monti has been mum on his thinking. He has said that he wants to make a decision on the matter before he steps down as EU antitrust chief, on October 31. The Financial Times of London’s Asian edition reported late on Friday that Monti would not block the deal. On the financial front, the battle wages on. Oracle just extended its $7.7 billion all-cash offer for PeopleSoft (now including JDE) until October 8, and it will very likely continue to extend that offer until it prevails upon PeopleSoft to drop its poison pill and let shareholders vote on the acquisition. That $7.7 billion offer may be a nearly 40 percent premium to PeopleSoft’s value in June 2003, when Oracle launched the takeover, but it is only an 11 percent premium, compared with the $7 billion market capitalization that PeopleSoft has today, now that it has successfully merged with JDE and held Oracle more or less at bay. It is hard to imagine PeopleSoft shareholders accepting this low bid, unless something dramatic happens to knock down PeopleSoft’s shares. PeopleSoft is using other weapons to make itself unattractive to Oracle, including beefing up the severance pay and benefits for its 12,000 employees. As is often the case after a merger, Oracle will very likely have to layoff a lot of people to make the deal financially possible. The changes in the severance packages, assuming that Oracle fires about half of PeopleSoft’s employees, would cost Oracle an extra $180 million. Perhaps the biggest poison pill that PeopleSoft has swallowed is IBM’s WebSphere middleware stack. At the PeopleSoft Connect show, the company announced a five-year pact that will see PeopleSoft use IBM’s WebSphere application server, portal, and development tools as the core tools for its Enterprise, EnterpriseOne, and World software suites. Before being acquired by PeopleSoft, JDE inked a similar deal with IBM, so technically PeopleSoft was already halfway down the WebSphere path. While IBM and PeopleSoft are vague about the specifics of the deal, they said that there would be hundreds of millions of dollars in new co-development and co-marketing budget allocated because of the partnership (which admits that the $1 billion figure is not all net-new monies). Thousands of programmers from both IBM and PeopleSoft will work together to weave WebSphere Portal, WebSphere Business Integration, WebSphere Application Server, and WebSphere Studio Application Developer into the very guts of PeopleSoft code. The companies will also spend years customizing features for specific industry verticals, in conjunction with unnamed third parties and in an attempt to differentiate PeopleSoft applications from those of rivals SAP and Oracle. The two companies said that they will initially focus on banking, financial markets, insurance, and telecommunications. IBM has already done a lot of work in the telecom space, and plans to leverage this work. The partners will also establish and run an interoperability testing lab as part of the deal. IBM and PeopleSoft will jointly market the resulting PeopleSoft solutions. IBM is very keen on growing its Unix and Windows market share, which it can do on the Enterprise and EnterpriseOne side of the house, while propping up its OS/400 server business, through continued marketing of PeopleSoft Express and the eServer i5 Solution Edition running the World suite, and through sales of EnterpriseOne upgrades to the 4,000-strong OS/400 customer base that PeopleSoft has by virtue of the JDE acquisition. It seems clear that PeopleSoft would rather support IBM’s DB2 database than Oracle’s, which is a lot more popular in the Unix and Windows server markets, where PeopleSoft sells its Enterprise and EnterpriseOne applications. IBM would love to have DB2 pushed very hard on the PeopleSoft applications. And selling WebSphere to such a large customer base is a good thing for IBM, too. And considering that Oracle is more or less allergic to WebSphere, in its own way, the IBM alliance, which puts in WebSphere and DB2 right where Oracle would probably want to slip in Oracle 10g and its application server, is a technical rather than financial poison pill. Think about it: the lawsuits go on for one or two more years, and by that time, WebSphere is embedded in the PeopleSoft apps. How long will it take Oracle to extricate it and reintegrate its own database and middleware? How upsetting will this be to customers?
The question I have is this: is PeopleSoft getting preferential treatment from IBM, and, if so, won’t this cause blowback from the ISV community, where IBM has lots of partners that have signed similar deals. It seems unlikely that IBM has jeopardized itself in this way. In fact, IBM sources tell me Big Blue has been working on this PeopleSoft deal for more than a year, and that it is basically just like similar deals it has with other ISVs. Because IBM inked the deal with PeopleSoft in its hour of need, and because court documents revealed that IBM is well aware of how detrimental it would be to its business to have Oracle succeed in its acquisition of PeopleSoft, there has been a lot of talk that, at the eleventh hour, if it comes to this, IBM might acquire PeopleSoft itself. Given IBM’s philosophy of selling middleware instead of applications, and being as neutral as corporately possible when it comes to applications, such a deal seems well nigh impossible. But there is an outside chance that IBM, which had a strong heritage of application development in the midrange 15 years ago, might change its mind if it sees that middleware might become a commodity within the next few years. IBM can afford PeopleSoft (it may not be able to afford to buy SAP), and if the money and profits move away from middleware and toward applications, such an acquisition might make sense. IBM would be giving up a lot of partnerships to do this, however, and that would have a disastrous effect on server, storage, software, and services sales for Big Blue. IBM cannot buy a $2.5 billion software company for $8 billion to $10 billion and give up $20 billion to $30 billion in other sales because it has alienated its channel partners. Even if IBM could buy SAP, which brings in about $6 billion a year in software and services sales, it could not fill such a hole. The worldwide application software market has somewhere between 20,000 and 30,000 vendors and comprises a $100 billion market. IBM would have to buy a lot of companies to generate the same sales as it does today through strong partnerships (just like the PeopleSoft deal) with some 500 ISVs and relationships with thousands of others. The big unanswered question is what will Oracle do with the JDE side of PeopleSoft if it prevails? It might make sense for Oracle to sell that business, but then again, Oracle might just keep hold of it because no tier-two player could afford to buy it, and even if one of them did manage to scrape up the cash, the sale would only come back and haunt it later. Oracle will keep JDE. What it does with it, who can say?
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