June 14, 2004
Challenging Oracle
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It didn't take long for the complexity of the software industry to show just how hard it may be for the Justice Department to narrowly cast Oracle's proposed takeover of PeopleSoft Inc. Shortly before the doors swung open in San Francisco District Court last week, Microsoft and SAP disclosed they had recently broken off merger talks, a jaw-dropping revelation that illustrated just how quickly the competitive landscape could change.
The Microsoft-SAP bombshell alone would give pause to anyone assessing who competes with whom in the business-applications market. SAP is the market leader, and Microsoft an up-and-comer. What does it say about market dynamics when the up-and-comer has the wherewithal to consider purchasing the market leader--and the leader considers the offer from a position of strength, not weakness?
"The issue most likely to determine the outcome of this case is what the market is defined as," says Neil Herman, a software analyst with Lehman Brothers.
As the first week of the Justice v. Oracle trial unfolded, other sensitive inner workings of the industry also were laid bare. Oracle cited evidence suggesting IBM worried about losing millions of dollars in business if the deal went through. Oracle also pointed out that Verizon, which was testifying as a Justice Department witness, had negotiated free support from PeopleSoft when those two companies signed a software deal.
Lawyers huddled with U.S. District Judge Vaughn Walker to negotiate which supporting documents would be kept secret and which made public. At one point, Walker questioned Laurette Bradley, senior VP of IT at Verizon and a witness for the government, about why parts of a company document had been blacked out. Walker warned all sides he would take a "tougher line" on that practice, which could lead to the release of confidential contract information--or a reluctance among some witnesses to share such information at all.
The crux of the Justice Department's lawsuit to stop Oracle's acquisition of PeopleSoft is that it would reduce the number of vendors capable of providing financial-management and human-resources applications to large customers from three suppliers--Oracle, PeopleSoft, and SAP--to two. But Oracle argued there are other legitimate high-end application providers and introduced into evidence E-mail from PeopleSoft describing American Management Systems Inc. as "a very formidable competitor and a serious threat." Oracle also noted that the Justice Department itself recently awarded an applications contract to AMS.
SAP is the enterprise-apps market leader with, by its own estimate, 54% of the licensing revenue when measured against four competitors: Oracle (13%), PeopleSoft (12%), Microsoft (11%), and Siebel Systems (10%). SAP CEO Henning Kagermann downplays the potential impact of an Oracle-PeopleSoft combination on his business. "Honestly, if they were to become a really strong No. 2, then I would be concerned, but this is not the case," he said in an April interview. Why such confidence? SAP's licensing revenue climbed 5% last quarter--including a huge 45% jump in the United States--and Kagermann believes there's pent-up demand for business applications. The company is forecasting 10% license growth for the year. "Volume is there," Kagermann said.
32%
13%
51%
3%
