Oracle's Product Future: What Can the Past Tell?

Oracle's Acquisition History

Oracle's decision to acquire PeopleSoft, which finally came to fruition in December with a plum offering of approximately $10.3 billion (USD), was a bid to become the second biggest business applications provider in the market. However, Oracle, does not have a history of major acquisitions and has never faced the massive integration effort needed to be leverage its new asset. Moreover, Oracle is run by a management team that has never maneuvered a company through a takeover of this magnitude. Will it be capable of digesting what it has bitten—the largest trophy in the history of enterprise applications software?

Part five of the While Oracle and PeopleSoft Are to Fuse, Competitors Ruse—Leaving Customers (Somewhat) Bemused series.

Indeed, for nearly three decades since its inception, Oracle has been markedly unenthusiastic about acquisitions. However, some of its functional nuggets have come from a number of focused acquisitions of small companies. Oracle began its buying spree in the late 1990s with a series of analytic application and e-commerce companies, such as One Meaning, a metadata management provider; Thinking Machines, a data mining tool; and Carleton an extract-transform-load (ETL) tool, and continued its acquisitions of point products into the 2000s. (See Oracle Buys Carleton Corporation to Enhance Warehouse Offering, etc.) TopLink was acquired from WebGain in 2002, adding an object-relational mapping layer to the Oracle Application Server, and Indicast became the voice services component.

Then, in 2001 3Cube's on-line collaboration software became part of the Oracle iMeeting product. Further, in 2002, Stetlor's Corporate Time product became Oracle Calendar, a part of the Oracle Collaboration Suite. The acquisitions of NetForce and SiteWorks Solutions in 2002 and 2004, respectively, were used to expand the scope of Oracle E-Business Suite within the life sciences industry. The vendor has also garnered its product lifecycle management (PLM) and customer relationship management (CRM) capabilities through several acquisitions, including a guided selling configurator from Concentra and call center management from Versatility, both acquired in 1998. In late 2001, a streaming computer-aided design (CAD) viewing technology was acquired from Assentive. This technology allows remote teams to jointly review and markup a live model in real time and in the field, without a full model download or a fast T1 connection (see Oracle Renders Its PLM Outline).

This is Part Six of an eight-part note.

Part One detailed the event.

Part Two presented the competitive response of SAP and Microsoft.

Part Three detailed how competition involves infrastructure.

Part Four was a reality check.

Part Five discussed what Oracle gains.

Part Seven is the SAP factor.

Part Eight will discuss challenges and make recommendations.

Prior Significant Acquisitions

While it has tacitly enhanced its research and development (R&D) program with the addition of these small technology start-ups, Oracle has only made three significant acquisitions prior to PeopleSoft, all occurring in the mid-1990s. In 1994, it acquired the Rdb relational database business of Digital Equipment for over $100 million (USD), and interestingly, Oracle's current head of database technology, Chuck Rozwat, came with the Rdb team. Some might find it rather indicative—and having a striking resemblance to recently unveiled product plans for J.D. Edwards and PeopleSoft—that Oracle never intended to give Rdb the same attention as that given to Oracle Database. Instead, it simply encouraged users to migrate. For users who chose not too, Oracle agreed to continue to support the Rdb reactionaries for ten years, in return for maintenance fees. Yet, despite continuing Rbd's development, and recently announcing a new beta Rdb release (of which, over half of the source code is reported to be new, and written under Oracle's ownership), Oracle remains on record as stating that the Oracle Database will never absorb its smaller sibling.

Oracle's acquisition of Express from the research house IRI, is a far less appealing story. In the early 1990s, a new type of database emerged that threatened the supremacy of relational database products, at least in the areas of BI and analytics. Online analytical processing (OLAP) products are the foundation of the most complex data analysis today and Express was acquired to help Oracle compete in this adjacent market. Yet, within a few years, Oracle let Express languish and, in the process, lost initiative and consequently the top position in the BI market. Now Oracle is considering the acquisition of the BI leaders like Business Objects, Cognos or Hyperion, to gain access in to the market.

Oracle's third takeover, which was of the process manufacturing software company DataLogix, had some merit and use. Occurring in 1996 for over $90 million (USD), this acquisition made Oracle a competitive force in some process manufacturing sectors (for some pertinent info, see Will Adonix Provide a Warmer Home to CIMPRO? ).

The PeopleSoft and J.D. Edwards Merger

Nonetheless, none of these transactions provided Oracle with any relevant lessons to help it consume an acquisition that, in financial terms, is 100 times larger than anything it has previously encountered. History teaches us that big mergers seem to go badly, at least as often as they go well. Either way, they rarely go smoothly and often fail to bring much boost to the acquirer. For example, let us then analyze the friendly merger of PeopleSoft and J.D. Edwards, to help discern the challenges that Oracle will face. Oracle has thrived by cultivating an ethos of intense competition within its own ranks, unlike PeopleSoft, which has traditionally had a more congenial, collaborative development approach.

PeopleSoft and J.D. Edwards apparently needed each other to increase their market presence. J.D. Edwards was stronger in PeopleSoft's weaker areas such as manufacturing, asset-intensive industries, and real-estate management, and helped it expand into the middle market (see PeopleSoft Gathers Manufacturing and SCM Wherewithal and PeopleSoft Revamps World for Its Mid-Market "Express" Conquest). J.D. Edwards, on the other hand, had been struggling to deliver more scalable infrastructure and functionality quickly, and had constantly sagging revenues, which were areas in which PeopleSoft could help. Seemingly, the two likely would have benefit from a symbiotic relationship. Thus, PeopleSoft initiated talks with J.D. Edwards several months prior to the merger announcement in June 2003.

Reportedly, the two companies had less than 10 percent of customers in common, and PeopleSoft had predicted cost savings of up to $200 million (USD) by the end of 2004 and had more than $190 million (USD) by the end of the third quarter of 2004. Layoffs were minimal in the newly merged company of 12,000 strong, with PeopleSoft terminating about 1,000 staff members, and closing some redundant facilities, and merging others.

The J.D Edwards and PeopleSoft merger was regarded as a complementary deal rather than a consolidation move, and PeopleSoft gained 5,000 customers, "leapfrogging" it to the number two spot in enterprise software charts. It was behind SAP and ahead of Oracle. Further, PeopleSoft did not exorbitantly overpay for J.D. Edwards, offering about a 20% premium, less than two times the amount of trailing, J.D Edwards revenues in a 12-month period. Despite some disappointing quarters over 18 months, PeopleSoft's sales grew year-over-year, as it posted revenues of $1.95 billion in 2002, $2.27 billion in 2003 and projected $2.7 billion in 2004 (USD). Also, in addition to enhancing and broadening PeopleSoft's product offerings, J.D. Edwards helped smooth PeopleSoft's revenues, increased its profits, and ultimately boosted its acquisition price. By all financial metrics, J.D. Edwards looked like a good acquisition, and culturally, the two companies were fairly compatible.

Yet, there were challenges. One big challenge came from how the two entities would deal with the market. PeopleSoft was primarily to sell to larger enterprises, while J.D. Edwards targeted smaller or medium customers, some of whom felt neglected after the deal and were resistant to PeopleSoft's 5 percent, across-the-board, increase for software maintenance and support, which was imposed soon after the merger. PeopleSoft had restructured the sales staff to sell both companies' products six months after the integration began. In early 2004 PeopleSoft was shipping bundled, cross-integrated products, but until recently there was little evidence of cross-selling. Ultimately, these were quite different markets, which made it difficult to create synergies among sales forces, given the former vendors had been inevitably selling to separate customer bases.

Moreover, there was no clear technology statement made about the direction the process-oriented architecture model would take. There was nothing other than a belated attempt to piggyback on the IBM technology stack, and trying to maintain separate product lines. Despite some organizational integration of sales teams and some intellectual property sharing, a plan to logically consolidate code bases—an immense opportunity to share functionality and leverage the economies of scale, was not stated.

The company was also reportedly too slow to explain territorial reorganization to its combined sales staff and was unsure how to deal with resellers that were a key channel to market for J.D. Edwards. Specifically, PeopleSoft poorly executed its attempted "shared services strategy", which aimed to convince customers to centralize white collar corporate functions, such as HR and finance, and run the departmental functions, such as manufacturing and distribution, on J.D. Edwards' astute software. Customers reportedly failed to embrace this strategy en mass, and SAP and others exploited the confusion, luring customers who were wary of signing with PeopleSoft amid a forthcoming, hostile takeover bid. There was also a defection of resellers, from which SAP was able to benefit.

What Oracle Faces

Given all of this, one should imagine Oracle's Herculean task of digesting PeopleSoft, which is itself, still digesting J.D. Edwards. More detailed execution plans have yet to be released, but clearly Oracle is seeking to reassure existing PeopleSoft partners within its PeopleSoft Connect channel program—an army of consultants and engineers will be needed to solve problems among four different products. There is also the expectation that the PeopleSoft customer base could be asked to accept a 2 percent rise in average maintenance fees to bring PeopleSoft fees in line with the Oracle level, which runs at around 22 percent. If this happens, J.D Edwards customers would be facing a second rise in maintenance fee levels, albeit with the rise from PeopleSoft, J.D Edwards customers also saw increased service levels. Despite the increased maintenance feeds, some J.D. Edwards users have also resentfully complained of the lack of attention by PeopleSoft and PeopleSoft used annual renewal processes to renegotiate maintenance, training, and license contract. In sales, however, Oracle has been known for being aggressive in negotiating customer contracts, while PeopleSoft has been seen as a partner and customer-friendly organization. This will only add to customer-anxiety, especially for the J.D. Edwards users who might be feeling like a minnow that was gulped by a bigger fish, only to be devoured again by a shark. They might be told that the increase will cover support and "innovation", covering the development of new software, and often these companies will have no need for that particular set of functionality.

The issue of maintenance fees will require a rather receptive conduct by Oracle if it is to keep the customer base, which, if one is to recall, was the major reason for the acquisition. Its challenge is to balance the need to retain the existing PeopleSoft/JD Edwards $1 billion (USD) maintenance stream against the advantages of streamlining product lines and reconciling the two maintenance fee levels and pricing schemes. PeopleSoft did not offer published prices per named user, but rather used a puzzling value pricing based on obscure variables like the user company's annual revenue, industry or number of employees. Oracle needs to do this while simultaneously addressing external demands to show demonstrable value from the $10.3 billion investment (USD).

One perception, which might be unfavorable to Oracle, is that many users' expect they will be asked to pay more, both for license fees, and for ongoing maintenance. Oracle will also, in the very least, have to deal with ongoing security updates and other basic software improvements to ensure that the PeopleSoft's products now running all over the world remain safe and secure.

Further, although Oracle plans to support and enhance all of the products, it intends to continue to go to market with only Oracle E-Business Suite, and will try to steer new deals away from PeopleSoft's product lines altogether. To be fair, Oracle will not actually refuse to sell those products, but it will not make it easy to buy them either, since for new sales, Oracle's original suite will be the focus. Still, the fact that any prospective user company looking for an enterprise system that is well suited for some vertical industries, will have limited choice, given that three solid ERP products will no longer being actively marketed.

There is also the challenge with the service oriented architecture-based, Project Fusion suite and its steep learning curve. This is in addition to Oracle's overly optimistic thirty-six month timeline, the scope, complexity, and architectural difference of the involved products, might halt the development on existing platforms. As a result, some users may be forced to consider migration. Also, the new technology will not be fully available until 2008, and Oracle's infrastructure commitments are unclear. Although it will reportedly support IBM and Microsoft databases and BEA's application server through 2013, it is unclear if that extends to the Project Fusion. The lesson of all of this is that one should really try to make distinction between the perception of what Oracle would prefer to do and what it can really do despite its huge financial and human resources, even if it wants to cater to all its customers' needs,.

In some ways, software maintenance becomes analogous to health or car insurance. All customers end up paying increased fees when large claims are made by only a few beneficiaries, regardless of whether they make a claim themselves. The logical response of affected customers is to shop for comparable coverage at a lower price instead of seeing their dollars siphoned for the benefits of others. It is not likely that PeopleSoft's customers will ebulliently jump to Oracle's proposed migration in droves (except, perhaps, for some truly Oracle technology shops). Even current Oracle's customers, which includes an unhappy lot disappointed with the quality issues of Oracle E-Business 11i, might become wary of future Oracle products, as the company becomes distracted by assimilating PeopleSoft. This scenario will be further complicated by Oracle's acquisition and absorption of Retek, despite Retek's technological compatibility and a long partnership with Oracle.

This concludes Part Six of an eight-part note.

Part One detailed the event.

Part Two presented the competitive response of SAP and Microsoft.

Part Three detailed how competition involves infrastructure.

Part Four was a reality check.

Part Five discussed what Oracle gains.

Part Seven is the SAP factor.

Part Eight will discuss challenges and make recommendations.

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