PeopleSoft balks at Oracle takeover bid

PeopleSoft Inc. Chief Executive Officer (CEO) Craig Conway came out strongly against the surprise hostile takeover bid launched by Oracle Corp. on Friday, calling it "atrociously bad behaviour."

The offer is nothing but a competitive strike to disrupt the acquisition of J.D. Edwards & Co. announced by PeopleSoft just a few days ago, Conway said in a statement.

PeopleSoft and its board of directors will review the Oracle offer and will provide a recommendation to shareholders, the company said. In the meantime, PeopleSoft advises its shareholders to take no immediate action.

PeopleSoft's board is planning to meet this weekend, a PeopleSoft spokeswoman said. She would not say if Oracle CEO Larry Ellison has been invited to that meeting.

Ellison in an interview on CNBC prior to Conway's remarks said Conway was the first to bring up a merger between PeopleSoft and Oracle about a year ago.

"Craig Conway, the CEO of PeopleSoft, called me on the phone about a year ago and said he wanted to put the two applications businesses together. It really was their idea to choose us as a partner in the applications space," Ellison said. "We couldn't agree on structure and we couldn't agree on price back then, so we now made an alternative and decided to go directly to PeopleSoft shareholders."

Prior to joining PeopleSoft in May 1999, Conway had spent eight years at Oracle Corp. as executive vice president of marketing, sales, and operations, according to PeopleSoft's Web site.

Oracle, of Redwood Shores, California, is offering US$5.1 billion cash, or US$16 per share, to acquire PeopleSoft. Oracle plans to stop selling PeopleSoft products to new users, but continue support for current users while encouraging those users to switch to Oracle's applications.

Industry analysts say PeopleSoft users are in for a rough transition if the takeover happens.

The Pleasanton, California, enterprise application vendor like many large U.S. companies has measures in place to prevent a hostile takeover. This includes a shareholder rights plan known as a "poison pill" that will increase the price of acquiring the company's shares to a prohibitive level when a takeover bid is launched, financial analysts said Friday.

Oracle might choke on this poison pill, or at least will be forced to raise its offer from the US$16 per PeopleSoft share announced Friday, said Richard Petersen, an analyst at financial services firm WR Hambrecht + Co. in San Francisco.

"Unless PeopleSoft wants to be acquired they won't be. There is no such thing as a hostile takeover here, it can't happen," he said. "I think odds are against this transaction being completed."

However, Brendan Barnicle, senior research analyst at investment bank Pacific Crest Securities in Portland, Oregon, said PeopleSoft's poison pill is not hard to disgorge. If Oracle gets the backing of 51 percent of PeopleSoft shareholders, the issue is off the table because of an "action by consent clause," he said.

"There is always a poison pill issue, but this clause will make it easier to resolve than in other companies," Barnicle said.

Besides the poison pill issue, financial analysts agree that Oracle's cash offer of US$16 per share for a total of US$5.1 billion won't be enough. Shares in PeopleSoft closed up 18 percent at US$17.82 on Friday from its previous close of US$15.11 on the Nasdaq stock exchange.

"We will see a bidding war, it is certainly going higher than US$16 if a deal is going to get done," said Barnicle.

Prudential Financial Inc. analysts seconded Barnicle's opinion in a first take on the takeover news Friday, stating that a higher bid would be necessary for the deal to close. Bank of America Securities LLC analysts in a research brief said the deal is "far from being a slam dunk" and that PeopleSoft shareholders will demand a more significant premium, closer to between US$20 and US$25 a share.

WR Hambrecht + Co.'s Petersen doesn't expect Oracle to up its bid. "We estimate there is a 25 percent chance that Oracle increases its offer on Monday, probably to US$20 (per share). Conversely, we believe there is a 75 percent chance the deal falls apart over time," Petersen wrote in a research report Friday.

Oracle Chief Financial Officer Jeff Henley wouldn't divulge if Oracle would increase its offer.

"We've made what we think is a very good, sound offering." Henley said in an interview.

Ellison on CNBC said Oracle's offer to PeopleSoft shareholders beats PeopleSoft's plan to buy J.D. Edwards.

"We are offering the PeopleSoft shareholders a compelling alternative to this very risky merger with J.D. Edwards," Ellison said.

Successful or not, the offer helps Oracle and German application vendor SAP AG in the highly competitive enterprise application market because it stirs uncertainty about PeopleSoft and J.D. Edwards, all the analysts agreed. If Oracle acquires PeopleSoft, that almost certainly means significant staff cuts at PeopleSoft, the analysts said.

"PeopleSoft's quarter is already in a lot of trouble. Software companies typically do a lot of business in the end of the quarter. I believe that the sales force at PeopleSoft is very distracted and is spending more time seeking other employment instead of closing transactions," Petersen said.

WR Hambrecht + Co. downgraded PeopleSoft to a sell rating from a hold, telling investors to take advantage of the boost PeopleSoft shares got on the news of Oracle's offer.

(Stacy Cowley in New York contributed to this report.)

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