Jun 24, 2004 (02:06 PM EDT)
Trial Illuminates Ripple Effects Of Oracle's PeopleSoft Bid

Read the Original Article at InformationWeek

SAN FRANCISCO (AP) -- It's becoming increasingly clear that PeopleSoft Inc. isn't the only high-tech heavyweight worried about Oracle Corp.'s hostile takeover bid for the business software maker.

The evidence pouring out of an antitrust trial challenging Oracle's $7.7 billion bid shows the proposed deal also has alarmed Microsoft Corp. and IBM Corp.

Previously confidential documents released at the trial late Wednesday illuminated why a possible Oracle takeover is raising concerns beyond PeopleSoft's headquarters--both Microsoft and IBM fear the competitive landscape will tilt against them if Oracle takes over PeopleSoft.

That unwelcome prospect prompted Microsoft chairman Bill Gates to begin considering some extraordinary defensive measures the day after Oracle launched its June 2003 bid, according to trial evidence. IBM also drew up a strategy to undercut Oracle's bid, although the specifics of that report so far have been kept under seal.

Gates floated the idea of joining forces with PeopleSoft through a minority investment in the company, according to a June 7, 2003 E-mail sent to Microsoft CEO Steve Ballmer.

In a message sent on a Saturday afternoon, Gates warned that an alliance with PeopleSoft might be "complicated" because it risked alienating another important business partner, German software maker SAP, a major PeopleSoft rival.

Microsoft has never approached PeopleSoft about an investment, PeopleSoft spokesman Steve Swasey said Thursday. "This just seems to be the musings of Bill Gates," Swasey said.

Microsoft has no current plans to invest in PeopleSoft, Microsoft spokesman Jim Desler said.

American Technology Research analyst Donovan Gow said if Oracle prevails in the antitrust trial, Microsoft might revisit the idea of investing in PeopleSoft to help block the deal. "But I kind of doubt Microsoft would want to get into an all-out bidding war with Oracle," Gow said.

PeopleSoft's shares fell 22 cents Thursday to close at $18.47 on the Nasdaq Stock Market. Oracle's offer values PeopleSoft at $21 per share.

Buying PeopleSoft would cost Microsoft a lot less money than another of its potential countermeasures--a takeover of SAP, a deal that analysts say would have carried a price tag of at least $50 billion.

After Gates raised the possibility of buying SAP in that same E-mail to Ballmer, Microsoft began pursuing the idea over the next nine months under an initiative called "Project Constellation."

Both Gates and Ballmer met with SAP executives about a possible deal before the two sides ended the talks in the spring, concluding that the transaction would be too complex to pull off, according to trial testimony.

If Oracle buys PeopleSoft, both Microsoft and IBM are worried about substantial losses in their database sales. Oracle is the leading provider of database software, but Microsoft and IBM have been gaining market share with less expensive products in recent years.

The database products of Microsoft and IBM are made to support the business applications of all the major software makers. In contrast, Oracle's database only works with Oracle's business applications software--a dynamic that raises the possibility that a takeover would lead to PeopleSoft products becoming incompatible with the Microsoft and IBM products.

That prospect rankled both Microsoft and IBM executives, according to evidence presented during the trial. In its confidential report, IBM projected significant database sales losses if Oracle bought PeopleSoft. The specific figures cited in the IBM report have been kept under seal, but Oracle attorneys have indicated they will try to release the numbers before the trial ends next week.

Microsoft also is worried that Oracle might be able to shift more customers from the Windows operating system to Linux, according to internal documents.

Oracle is pursuing PeopleSoft largely because it wants to expand its database share, according to Gary Reback, a PeopleSoft attorney. He believes it's one of the reasons that the Justice Department decided to sue to block the deal, even though the database market isn't the focal point of the antitrust trial.

"Trying to look closely at the database market would have made a complicated case even more complicated," Reback said.

The antitrust case instead involves how an Oracle takeover would affect competition in a narrow market serving large U.S. companies that depend on complex software to automate many financial and personnel management jobs.

The Justice Department presented its final witness Wednesday. Oracle attorney Daniel Wall said Thursday that the company will rest its case June 30. U.S. District Judge Vaughn Walker is expected to issue his decision in August or September.