Battle in the Valley triggers panic

Oracle's hostile bid for rival software firm PeopleSoft sparks concern among customers

If you are a computer systems manager for a large company or government agency, the furious takeover battle between the two largest software providers in Silicon Valley, Oracle and PeopleSoft, has to be your worst nightmare.

Installing digital systems to manage personnel files, accounting and day-to-day inventory can take years and usually involves close personal interactions between the software company and the client to troubleshoot a litany of problems and ward off the ever-looming threat of system breakdown.

So the very notion that Larry Ellison, Oracle's hard-driving chief executive, could - as he has threatened - buy out PeopleSoft, scrap its products, fire its staff and try to push Oracle's own products instead has triggered something close to panic in hundreds of companies, state agencies, universities and other large organisations.

As Wynne Powell of British Columbia's public health service authority told the San Francisco Chronicle last week: "What can we tell the British Columbia public? That their public health system is going to be thrown into total chaos because an American CEO wants to crush his competition?"

On the other hand, if what you are looking for is pure, elemental drama in the business world, the Oracle-PeopleSoft stand-off is hard to beat. Craig Conway, PeopleSoft's chief executive, is a former marketing chief at Oracle who has described his former boss's behaviour as "sociopathic and diabolical". "It's a page straight out of Genghis Khan," he fumed last month.

Mr Ellison, meanwhile, takes the Genghis Khan comparison as a compliment. One of his favourite sayings is adapted from the old Mongol warlord: "It's not enough that we win. Everyone else must lose." The drama began a month ago, when Oracle brutally intervened in the planned merger of PeopleSoft with another big business software company, JD Edwards of Colorado. The PeopleSoft-Edwards combo would almost certainly displace Oracle's primacy in the US marketplace - worldwide, the German company SAP is number one - and that apparently gave Mr Ellison enough reason to seek to wreck it.

Oracle's initial offer was for $16 a share - more than $5bn in all - which was barely above the market price at the time and fell significantly under once the market reacted and PeopleSoft's stock price soared. To add injury to this insult, Mr Ellison said he intended to fire all but a handful of PeopleSoft's 8,000 employees, scrap its systems and take the only thing that really interested him, its customer base.

PeopleSoft, naturally, went ballistic, as did many of its clients. The state of Connecticut, which estimates it has spent $100m integrating its systems with PeopleSoft software, even filed an antitrust lawsuit to try to block the takeover.

In an apparent effort to mollify his critics, Mr Ellison then modified his original offer. Oracle would now be willing to pay $19.50 per share for PeopleSoft, he announced on 18 June. PeopleSoft's products would not be discontinued, only the promotion of them. And Oracle would undertake to provide customer service to old PeopleSoft clients for as long as they needed it.

If this was intended to soften the PeopleSoft board, it did not succeed. "Larry, everyone heard you the first time," the company sneered in a full-page advert in the Wall Street Journal.

And so the war of words was joined. PeopleSoft warned its customers they might be forced to switch to an "inferior product" if the takeover goes through. Oracle, meanwhile, accused PeopleSoft of using "scare tactics" with its customers, 80 per cent of whom use Oracle software too.

Both companies have sued each other, with PeopleSoft accusing Oracle of launching an offer purely to undercut its business, and Oracle accusing PeopleSoft of breaching its fiduciary responsibility to its shareholders by refusing to take the bid seriously.

This week there was an added twist when the Justice Department announced it was launching a full-scale investigation into the proposed takeover on antitrust grounds - something that would delay even a successful bid for months. The government antitrust watchdogs said they were also investigating the proposed PeopleSoft-JD Edwards merger, although it appears that union might face fewer obstacles in the short term. PeopleSoft has talked confidently of putting together a provisional version of the proposed $1.7bn merger with JD Edwards by the end of this month.

In the meantime, financial analysts are wondering what is really going on. What is Mr Ellison's game plan? And why the extraordinary acrimony, given the self-evident distress it is causing to the customers of both companies? There are, broadly, two theories. The first is that Mr Ellison really wants to sink his claws into PeopleSoft and believes he can bluster his way in through sheer force of will. By scaring PeopleSoft's customers, he can damage the company's standing, provoke a brain drain of senior management and erode its bottom line. At that point, the takeover bid might start to look a little more attractive - better to swim with the sharks than not to swim at all.

Mr Conway stands to earn more than $70m from the sale of his own shares in PeopleSoft. Under the terms of his contract, he would also receive two years' severance pay and the opportunity to cash in all his outstanding stock options. Should he decide to throw in the towel, he'll have a pretty soft landing.

The second theory is that Mr Ellison has no real interest in PeopleSoft and understands the company's products are too close to Oracle's own to create the conditions for a successful merger, especially in a hostile atmosphere. What he is really afraid of is the PeopleSoft-JD Edwards deal; his is the strategy of a demolition expert wielding a giant wrecking-ball. The hostile bid is an excuse to file lawsuits, attract the attention of the Justice Department, force PeopleSoft to exercise various "poison pill" share-issue options.

If PeopleSoft customers panic and either switch to Oracle or another company, so much the better. If JD Edwards gets scared by the enormity of what it is getting into and backs off, better still.

If anyone knows how Mr Ellison operates it is Mr Conway, who confided last year that "there's a little bit of Larry Ellison that lives in me". Aside from his rhetorical flourishes, Mr Conway spent much of June battling furiously for his company's bottom line, the theory being that if second-quarter sales were dented by the takeover bid it might depress PeopleSoft's share price and increase pressure to cave in to Oracle. If, on the other hand, sales could be kept buoyant, that would be a point in PeopleSoft's favour.

Yesterday, PeopleSoft rushed out preliminary second-quarter figures showing higher than expected revenue of $490-500m, up from its own previous estimates of $450-460m. Ding-ding, end of round one. Now it's time for round two.