Frantic Merger-Mania Spiced Up With Vendettas Leaves Customers Anxious


Observation of Recent Events

The recent flurry of acquisitions, some of them involving a great part of drama, emotions, and personal recriminations due to their hostile nature, would be the crown evidence that the business application software space is consolidating, a process which started a few years ago primarily in the mid-market space (see The Mid-Market Is Consolidating, Lo And Behold), but is now spreading across the range.

Indeed, the month of June started with earth shattering merger activity and a strange algebraic calculus (i.e., 3+5=2) that should fundamentally reshape the enterprise applications landscape. Namely, on June 2, PeopleSoft, currently the No. 3 leading business applications provider and J.D. Edwards, currently the No. 5 business applications provider (if one is to include the customer relationship management (CRM) specialist Siebel Systems), announced a definitive agreement for PeopleSoft to acquire J.D. Edwards, creating thereby the world's No. 2 enterprise applications software company and toppling Oracle's applications business current position in the market share hierarchy. Combined, the merged companies would have approximately $2.8 billion in annual revenues (which includes a substantial amount from maintenance and service revenue), 13,000 employees and more than 11,000 customers in 150 countries. With this acquisition, PeopleSoft hoped to expand its presence in more than 20 industries including a broad range of services, manufacturing, distribution and asset- intensive industries.

Retaliating or not, Oracle then announced on June 6 its intention to acquire PeopleSoft (likely without J.D. Edwards in the equation) for $5.1 billion in cash (i.e., valuing each PeopleSoft's share $16, which was ~5% premium over the actual price at the time), as to expedite both its and PeopleSoft's shareholders approval process. Contrary to the above PeopleSoft/J.D. Edwards move, which was a diligently (and clandestinely, like in a plausible spy thriller movie) thought-out friendly merger and with many merits of complementary nature and of taking customer bases' concerns into consideration (albeit no one can dispute certain inevitable challenges of merging the two large software organizations), Oracle's move seems as a mere attempt of the customer base hijack and of a candid elimination of the competitor (i.e., 1+1<2) it has grown to like to hate over a long recent period of neck-to-neck competition for almost every new enterprise applications deal.

After the initial dismissal of the offer from PeopleSoft's CEO, and even a threat of a legal action for damages caused by Oracle sowing seeds of fear within PeopleSoft's prospects, the targeted vendor eventually backed off from threats and decided to go through the offer consideration steps required by the law. Thus, surprising to hardly anyone, on June 12, PeopleSoft's board of directors unanimously rejected the offer citing undervaluation and disruptive intent as main factors, as well as potential antitrust ramifications in the US and Europe. The final say is therefore in hands of PeopleSoft's shareholders, while the industry is also waiting to see PeopleSoft's forthcoming quarterly results and whether Oracle will counter bid with a follow up offer that might be difficult to reject.

Not to allow Oracle to be too relaxed during its pondering, on June 12, J.D. Edwards announced that it has filed suit in Colorado state court claiming that Oracle has tortuously interfered with its proposed merger with PeopleSoft announced earlier. The suit seeks $1.7 billion in compensatory damages and an unspecified amount in punitive damages. J.D. Edwards is also filing suit in California state court against Oracle and two of its executives. The California suit alleges that Oracle, Larry Ellison, Oracle chairman and CEO, and Chuck Phillips, Oracle executive vice president, have engaged in wrongful conduct and unfair business practices. It seeks an injunction that enjoins Oracle from proceeding with its tender offer for PeopleSoft.

Further, Oracle exceeded expectations in Q4 2003, which it reported on June 12, and which gave boost to its share price and its takeover aspirations. Given this has put PeopleSoft additionally under pressure, as seen in its share price dangerously approaching the bid level (after soaring to above $18 level immediately after the offer), on June 13 PeopleSoft announced that it has sued Oracle Corporation to put an end to what it characterizes as a sham tender offer aimed at destroying PeopleSoft's business. The complaint, filed in Alameda County Superior Court, alleges that Oracle has engaged in unfair business practices, trade libel and tortuous interference with PeopleSoft's customer relationships. According to the suit, Oracle's true intent in making the tender offer was to undercut PeopleSoft's business operations by disparaging PeopleSoft's products, services, and future prospects, undermine PeopleSoft's viability by creating uncertainty and doubt in the minds of PeopleSoft's customers and prospective customers, and interfere with PeopleSoft's plan to merge with J. D. Edwards and Company. On June 16, PeopleSoft also amended its original bid by offering to pay up to half of its friendly bid for J.D. Edwards in cash, in order to fend off a hostile bid from Oracle. The chain of events is far from being finished

Meanwhile, on June 3, in the shadow of the above higher-profile mergers and spared from any controversy, ailing Invensys eventually sold Baan to private investors General Atlantic Partners and Cerberus Capital Management, which plan to merge it with SSA GT and create a sort of a manufacturing mid-market ERP empire backed up with a $14 billion capital fortune. SSA GT not that long ago also purchased interBiz and Infinium (see CA Unloads interBiz Collection Into SSA GT's Sanctuary and Is SSA GT Betting Infini(um)tely On Acquisitions?), and is still reportedly eyeing multiple more acquisitions of ailing competitors with notable products and install bases, former supply chain management (SCM) leaders i2 Technologies and Manugistics being speculatively mentioned.

Some claim that the recent effervescent spate of acquisitions could be traced back to Microsoft's acquisition of Great Plains and Navision (see Microsoft 'The Great' Poised To Conquer Mid-Market, Once and Again) in its unveiled quest to create a $10 billion application business empire by 2010. Given that its current applications revenue is only' at about $500 million, and given modest to dismal prospects of organic growth in this economy, it is a no brainer that the remaining $9 billion-and-the-"small change" in desired applications revenues will be supplemented through acquisitions, and given Microsoft's almost infinite buying power to entertain its (also almost infinite) aspirations.

This is Part One of a two-part note.

Part Two will continue the Analysis and make User Recommendations.

Analysis of These Events

Why such a frenzied consolidation? For years, application vendors have fueled their success through mushrooming new accounts but things have drastically changed during past few years. Most application software markets are mature and highly penetrated nowadays, with only a few new accounts available. To continue to be healthy, an enterprise software vendor either needs a defendable niche or a large market share. For the latter, acquisitions are often required to grow and prosper. With revenue streams shifting from new accounts to up- and cross-sales to existing customers, software support and services, a large customer base is the key to continued health.

Alternatively, smaller vendors are developing defendable niches where the bigger vendors cannot afford to have a solution. By definition, these vendors, often referred to as boutique, niche and/or best-of-breed vendors, are serving smaller, specialized markets and therefore will not grow into a larger company but will remain smaller but highly profitable. Thus, we expect the market for application software to break into two tiers. The first group will be a limited number of very large vendors, while the second group will be a large number of small, highly focused vendors. This migration has long started and will continue in earnest.

The Big Five (or perhaps it will be Four, Six or Seven) will thus have a business model that focuses on the customer base. They will depend upon support and maintenance revenues as a primary stream and on operational efficiency. They will also try to sell additional software and services to the base. A large customer base also gives the surviving vendors the economy of scale for support, services, and technology investments. How large of a customer base will prove large enough? The still undisputed leader, SAP, now claims nearly 20,000 customers, many of which are large and mid-size global enterprises. SSA GT/Baan combination currently claims 16,500 primarily mid-size global customers, which number is to likely grow via many more desired acquisitions. To be a Big Five player, vendors need to get into this range or even larger.

In the past, some vendors have justified acquisitions with a plan to replace the new customer's software products with the vendor's existing products. Except for Oracle's yet another outmoded, wayward "back to the future" ploy against the current market trend (remember its still ongoing attempt to persuade customers to obtain everything from Oracle, even if that means several years of waiting for the functionality to happen?), that is not necessarily the case any more since it is very expensive, in terms of both money and disruption, for a customer to change application software. Therefore, most customers want to keep the software they have, increase the value received and grow with it. A case in point would be Solomon IV, which continues to thrive and to be enhanced within Microsoft Business Solutions (i.e., its recently released 5.5 version features integration with Microsoft Project and many well-attuned features for project-based professional service businesses), despite some pundits' predications of its demise even when it was acquired by former Great Plains in 2000. Even the venerable MANMAN product has had notable enhancements under SSA GT's roof within its version 12, although this product faces the impending predicament of the HP e3000 hardware platform discontinuation in 2003, which goes beyond SSA GT's control.

Meanwhile, every other vendor that grows through acquisitions must continually simplify its development systems so that it can profitably support disparate businesses, allowing them to invest and grow. Successful vendors must be able to meet both goals simultaneously — doing what is right for the customer and while doing what is right for their business. We nonetheless see the challenge for every vendor who acquires its way into the Big Five to manage too many different products it has acquired to concurrently reach these two objectives.

New Accounts and the Big Five

Of course the Big Five will continue to sell new accounts, particularly in still non-penetrated and/or emerging markets. In Asia-Pacific, East and Central Europe, Africa, and South America, new accounts will represent significant license growth. This is important for the future health of these companies, driving them to innovate and replacing natural installed-base attrition. In our recent note that has predicted vendors consolidation, albeit not with such a rampant and controversial turn of events in one single week (see What Does Vendor Consolidation Mean To The End User?), we foresaw the Big Five coming from several sources. We had to concede that SAP was already there and will remain there, as it has the base and momentum already, and is inconceivably an acquisition target. Of the other large vendors (i.e., J.D. Edwards, Oracle, and PeopleSoft) we saw one or two making it into the Big Five but which one(s)? While PeopleSoft had all but answered our question with its recent merger intent, Oracle, having the other ideas in that regard, has definitely put a spanner in the works.

We expect Microsoft Business Solutions and Sage/Best Software, now with several hundred thousand and even millions customers respectively (albeit most of them being small businesses, and not including small offices/home offices (SOHOs)) to be one or both within the Big Five. We also envision room for a company to acquire its way into the Big Five, the stampeding SSA GT being one. Maybe these recent events will finally force Siebel Systems off its high horse to realize that remaining a CRM specialist will not suffice in the long run and to start looking for targets (and also over its shoulders the vendor has over $2 billion in cash, which is more than SAP's cash reserves, although SAP has approximately five times Siebel's revenue).

The enterprise applications entail quite a bit more then to e.g., know when your most profitable customers' important life events are, as to blast them with a promotional marketing campaign. How about making sure these offers can be seamlessly delivered and invoiced, which goes hardly at all without integration with ERP and/or SCM systems? The plummeting license revenues (i.e., over 90% year over year in its most recent quarter) should have long enticed Siebel in acquiring a notable ERP vendor (e.g., Lawson Software, which has long been its partner focusing on similar service industries, and which has also been subdued of late), rather than venturing into more minute CRM point solution acquisitions, like the recent acquisition of messaging vendor BoldFish.

Analysis of the PeopleSoft-J.D.Edwards-Oracle Situation

Thus, the PeopleSoft-J.D. Edwards merger and Oracle's hostile takeover bid for PeopleSoft are quite about retaining a Big Five seat and about the need to be bigger within shrinking market opportunities. Frankly, it was possibly more logical to have expected a smaller manufacturing ERP or SCM vendor to be the next PeopleSoft prey. Indeed, PeopleSoft could have achieved most of its objectives by acquiring, e.g., Baan, QAD, Epicor, IFS, Intentia, Geac, or i2 Technologies, and for only a fraction of J.D. Edwards' price tag.

Why then this quite pricey acquisition, which has likely tempted fate by inviting Oracle to act in a knee-jerk fashion? In addition to the joy of finally vaulting over formidable foes Siebel and Oracle, there were lots of business approach similarity between the two vendors' CEOs, at least in their similar financial discipline and their ways of turning their respective companies around, at about the same timeframe (see Figures 1 & 2).

Figures 1

Figures 2

Even the recent drop in license revenues of both vendors has had a similar pattern (see Figures 3 & 4), although Oracle's claim of PeopleSoft and J.D. Edwards' distressed performance could be attributed in part to a psychological war', given both vendors' more than solid cash reserves.

Figures 3

Figures 4

While PeopleSoft did not want to inherit any excessive baggage with the acquisition of a struggling smaller vendor, it will have now gotten much more than it has bargained for (and possibly, much more than it might be able to handle) with Oracle's intervention. Regardless of whether Oracle was serious about the acquisition (i.e., the bid price is regarded by many as too low, but, on the other hand, Oracle might know something we don't know yet, given its improved Q4 2003 results, and the amounting pressure on PeopleSoft that is soon to report Q2 2003 results, and given the fact that PeopleSoft's shareholders may not have the same concerns and desires as PeopleSoft's customers, i.e., the money talks') or its only intention was to derail PeopleSoft's merger plans, in addition to putting PeopleSoft's future in question, the entire market has embarked on a trip with no return. Yes, Oracle seems the winner and PeopleSoft (and J.D. Edwards to a degree) the loser whatever the bid's outcome might be, at least due to disconcerting the existing customer base and likely stalling new customer sales, till the matter is duly solved.

To give devil its due, one might acknowledge Oracle's rationale to acquire the archrival given its protractedly sagging applications license revenues that have been riding on the coattails of also shrinking database revenues, with the exception of the most recent quarter that the vendor reported on May 12 (see Figures 5 & 6, and Stalled Oracle Fumbling For A Jump-Start Kit). Also, the bid is about many more adjacent markets beyond business applications, such as database, application server, email/collaboration server and middleware, all of which Oracle competes in, and is hoping to use as fertile ground for excellent up- and cross-selling to PeopleSoft's customers.

Figures 5

Figures 6

However, Oracle should not gloat much over its possibly shrewd move to instill FUD (fear, uncertainty and doubt), given it has yet again drawn the market consternation and has likely proven to be a less customer-friendly vendor (if not necessarily a product). Just when we thought we were over Oracle's controversial one-stop-shop' and no multi-vendor interconnectivity' mantras, given it has recently shown some amenability to admitting the multi-vendor world out there (see Oracle Makes A U-Turn At The 'All Things To All People' Exit), and given it has largely bridged the chasm with its independent user group, Oracle Applications User Group (OAUG), comes up with another attempt to tell the customer what is best for them (let us guess, Oracle's wall-to-wall technology stack), rather than to listen more closely to their concerns.

While it is not likely that PeopleSoft's customers will ebulliently jump to Oracle's proposed migration in droves (except for perhaps some truly Oracle technology shops), even current Oracle's customers that have still not been the happiest bunch on earth when it comes to Oracle E-Business 11i quality issues, might be wary of the future products' quality when Oracle becomes distracted by the immense PeopleSoft's assimilation. Again, all on condition the bid goes through.

About the Authors

Olin Thompson is a principal of Process ERP Partners. He has over 25 years experience as an executive in the software industry. Olin has been called "the Father of Process ERP." He is a frequent author and an award-winning speaker on topics of gaining value from ERP, SCP, e-commerce and the impact of technology on industry.

He can be reached at

Predrag Jakovljevic is a research director with (TEC), with a focus on the enterprise applications market. He has over 15 years of manufacturing industry experience, including several years as a power user of IT/ERP, as well as being a consultant/implementer and market analyst. He holds a bachelor's degree in mechanical engineering from the University of Belgrade, Yugoslavia, and he has also been certified in production and inventory management (CPIM) and in integrated resources management (CIRM) by APICS.

This concludes Part One of a two-part note.

The analysis continues in Part Two.

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