The US Department of Justice (DOJ) filed a lawsuit to block Oracle's attempted hostile takeover of PeopleSoft.

If the combination took place, it would eliminate competition between two top providers of enterprise software, resulting in higher prices and fewer choices for customers, the DOJ said. The agency said it sees Oracle, PeopleSoft and SAP as the only companies that sell enterprise applications meeting the needs of large organisations.

The attorneys general of Hawaii, Maryland, Massachusetts, Minnesota, New York, North Dakota and Texas are joining the DOJ's lawsuit, which was filed in the US District Court in San Francisco.

"I think the decision here was very clear," assistant attorney general R. Hewitt Pate said. "Going from three to two companies in this market is a competitive problem that needed to be stopped. Under any traditional merger analysis, this is an anticompetitive deal."

DOJ officials recommended earlier this month, in a preliminary decision, that the agency move to prevent the acquisition. Executives from Oracle, which maintains that the enterprise software market is highly competitive, said they would work to change the agency's mind. The company had indicated that if the DOJ moved to block the acquisition, it would consider fighting the DOJ's decision in court.

Oracle representative Jim Finn responded to the DOJ's lawsuit with a written statement calling the agency's decision one "without basis in fact or law". Suggesting that the DOJ was influenced by an "aggressive lobbying campaign" by PeopleSoft's management, Finn restated Oracle's belief that an Oracle/PeopleSoft combination would benefit both companies' employees and shareholders.

In an investor presentation filed with the US Securities and Exchange Commission, Oracle laid out the foundation for its expected challenge.

Oracle plans to draw parallels to the DOJ's 2001 attempt to block SunGard Data Systems' acquisition of Comdisco's disaster recovery business. The DOJ said that deal would bring the market for disaster recovery services from three major vendors to two, and sued to prevent the merger. The US District Court for the District of Columbia rejected the DOJ's arguments and allowed the acquisition to proceed.

Oracle also intends to argue that the enterprise software market extends beyond its three largest vendors. Smaller ERP (enterprise resource planning) companies including Lawson Software and SSA Global Technologies's Baan unit, integrators such as IBM and Accenture, and new entrants including Microsoft compete for many deals and affect industry pricing, Oracle said in its SEC filing.

The DOJ's Pate said the agency is confident it has a strong case to take to trial. He denied that the DOJ's decision was improperly influenced by either company's management and, without offering details, said the DOJ has ample data to back its antitrust argument.

"This is a case that has its own facts and its own evidence that we're going to present," he said, in response to a question about how this case differs from the SunGard/Comdisco lawsuit. "I think the result is going to be clearly in favour of blocking this transaction."

PeopleSoft chief executive officer Craig Conway responded to the DOJ's lawsuit with a call for Oracle to abandon its bid. Calling the decision "the antitrust day of reckoning", he encouraged both companies to devote their energies to serving their customers and competing in the market.

Oracle's takeover campaign began in June when the company submitted to PeopleSoft's shareholders an unsolicited tender offer for control of the company. The all-cash offer has been raised twice and is now valued at $US9.4 billion. Oracle is offering $26 per PeopleSoft share, a price higher than PeopleSoft's shares have traded at in the past 52 weeks.

Following news of the DOJ's lawsuit, shares of PeopleSoft (PSFT) ended trading on the Nasdaq exchange on Thursday, down 2 per cent at $21.78. Shares of Oracle (ORCL) ended trading on the exchange up 1 per cent, at $13.28.

The next key juncture for the bid is PeopleSoft's annual shareholders meeting, scheduled to take place March 25 in California. Oracle proposed its own slate of nominees for PeopleSoft's board of directors, in hopes of landing control of a majority of the board. If Oracle's slate is elected, it could strip PeopleSoft's bylaws of protections preventing the deal and encourage shareholders to vote in favour of the takeover.

PeopleSoft's management, which vehemently opposes the deal, is locked in a battle with Oracle to win shareholder support for re-election of its incumbent directors.