Capping 18 months of bad blood, Oracle Corp. raised its takeover bid for bitter rival PeopleSoft Inc. by 10 percent to seal a $10.3 billion deal that will create the world's second largest maker of business applications software.
The agreement, announced Monday, caps a rancorous Silicon Valley feud marked by churlish exchanges between the companies' management teams and colorful courtroom battles.
Redwood Shores-based Oracle brought an end to the hostilities by sweetening its all-cash offer to $26.50 per share, up from a $24 bid that PeopleSoft's board had rejected as inadequate. The final offer represents a 75 percent premium from PeopleSoft's market value before Oracle launched the takeover battle in June 2003.
PeopleSoft's board has spurned five Oracle takeover bids during the past 18-months and maintained that the $24 offer didn't value the company fairly, reports Madeleine Acey of CBS MarketWatch
"A lot of people compared us to Don Quixote titling at windmills, but finally we now have PeopleSoft," Oracle CEO Larry Ellison said during an interview Monday. "Clearly, it's a great feeling. It's not that I wanted to win just for the sake of winning. It's the fact that PeopleSoft is instrumental to our strategy."
PeopleSoft's shares surged $2.47, or 10.3 percent, Monday to close at $26.42 on the Nasdaq Stock Market, where Oracle's shares climbed $1.35, or 10.1 percent, to close at $14.63. Until Monday's gain, Oracle's stock had been worth roughly the same as when the PeopleSoft saga started.
By picking up 12,750 PeopleSoft customers and nearly $3 billion in annual revenue, Oracle hopes to mount a more serious challenge to German software maker SAP's leadership in business applications software — the computer coding that automates a wide range of administrative tasks.
After completing the takeover next month, Oracle expects the PeopleSoft acquisition to boost its earnings by about $400 million, or 8 cents per share, during the fiscal year ending in May 2006.
"This is a coup for Oracle," AMR Research analyst Jim Shepherd said. "While there were other acquisitions that interested them, none could do for them what this will do."
Oracle eventually hopes to buy other tech companies, but won't consider any other large acquisitions until PeopleSoft is fully digested, Ellison said.
The fate of PeopleSoft's roughly 12,000 employees remains unclear. Oracle at one point drew up plans to fire more than 6,000 PeopleSoft workers, but the company recently has indicated that the purge might not be as dramatic as management originally envisioned.
"It's still going to be bloody for PeopleSoft employees," predicted Garban Institutional Equities analyst Richard Williams.
Keeping PeopleSoft's employees happy won't be as important to Oracle as pleasing most of the customers that it will inherit, Shepherd said.
For the deal to make financial sense, Oracle needs to keep collecting a steady stream of revenue for maintaining and upgrading the software of PeopleSoft customers. Some PeopleSoft customers have expressed serious reservations about the deal, threatening to either defect to SAP or another company specializing in software support.
"Our phones have been extremely busy with calls from PeopleSoft customers seeking an alternative," said Seth Ravin, president of TomorrowNow Inc., a Bryan, Texas-based company specializing in software support. "I think this Oracle is going to face some challenges" keeping PeopleSoft customers.
Oracle hopes to ease the customer concerns by continuing to develop new PeopleSoft products within a separate division of the merged company. "We are going to make heavy investments to keep those customers happy," Ellison said.
PeopleSoft provided Oracle extra incentive by offering unusual guarantees as it tried to fend off the takeover. The guarantees could force Oracle to refund up to $2.4 billion to PeopleSoft customers if product support diminishes. Oracle doesn't expect to trigger the refund clauses.
News of the long-delayed PeopleSoft deal overshadowed the release of Oracle's financial results for the quarter ended Nov. 30. The company earned $815 million, or 16 cents per share, a 32 percent increase from $617 million, or 12 cents per share, at the same time last year. The earnings per share were two cents above the mean estimate among analysts surveyed by Thomson First Call.
Oracle's revenue rose 10 percent in the quarter to $2.76 billion from $2.5 billion a year ago.
Pleasanton-based PeopleSoft desperately wanted to remain independent, driven in part by the company's deep-rooted disdain for Oracle's products, as well as Ellison's blunt and sometimes ruthless management style. At one point in the corporate skirmish, PeopleSoft employees donned T-shirts declaring, "Larry, Kiss Our Apps!" to convey their defiance.
"This has been a long, emotional struggle," said George "Skip" Battle, a PeopleSoft director who oversaw the Oracle negotiations. "The board salutes our employees for their outstanding dedication to PeopleSoft and is grateful to our customers who have continued to buy our products and stand by us during these uncertain times."
To get the deal done, Oracle also had to overcome the U.S. Department of Justice, which sought to block the deal because it believed the merger would harm drive up software prices and diminish product innovation. A federal judge rejected the government's antitrust claims three months ago, removing one of PeopleSoft's strongest takeover defenses.
Oracle's bid received another boost when PeopleSoft unexpectedly fired its chief executive, Craig Conway, a former Oracle employee who had spearheaded the company's defiant resistance. Ellison escalated the acrimony by occasionally taunting Conway.
After Conway's ouster, PeopleSoft's board began to focus its efforts on extracting a higher price while Oracle executives lobbied for a lower price. PeopleSoft suggested it was worth at least $31 per share while Oracle insisted that it wouldn't pay a cent above $24 per share.
The posturing changed over the weekend after PeopleSoft's board contacted Oracle to open serious negotiations for the first time since the saga began. The meetings gave Oracle its first chance to see PeopleSoft data that hadn't been publicly available, convincing the company could afford to raise the bid, Ellison said. "We also thought there was some real value to doing a friendly deal as opposed to a hostile deal."
Through November, Oracle had already spent more than $110 million in pursuit of PeopleSoft, which has poured more than $80 million into its takeover defense.
The truce came just before the rivals were set to renew their battle in a Delaware trial focusing on an antitakeover defense known as poison pill. The mechanism represented the final obstacle preventing Oracle from completing the takeover after 61 percent of PeopleSoft's shareholders last month agreed to accept $24 per share.
The Delaware trial and another lawsuit filed by PeopleSoft will be dropped as part of the sale.