While Oracle and PeopleSoft Are to Fuse, Competitors Ruse--Leaving Customers (Somewhat) Bemused

Observation of Recent Events

Courtroom drama, emotions, and personal recriminations have emerged from the flurry of typically friendly, if not civil, acquisitions in the IT world. While the business application software space began seeing consolidations as early as the 1990s with the disappearance of once prominent names like Dun & Bradstreet Software or ASK Group, an onslaught of mergers emerged in the early 2000s (see The Mid-Market Is Consolidating, Lo And Behold), disconcerting many customers (see Frantic Merger-Mania Spiced Up With Vendettas Leaves Customers Anxious). Yet few of these mergers have had more impact than that between business applications heavyweights Oracle and PeopleSoft. Early 2005 marked the end of over eighteen months of tug-of-war between the two providers and the antagonistic merger resulted in a strange type of "algebraic calculus" where 3 + 2 = 2 and will fundamentally reshape the enterprise applications landscape.

In mid-December, PeopleSoft, formerly the number two leading business applications provider, and Oracle, formerly number three (if one excludes its database and application server product lines), announced a definitive agreement for Oracle to acquire PeopleSoft for $26.50 per share, at a total cost of approximately $10.3 billion (USD). The transaction was finally approved by both companies' respective boards of directors and closed in early January. It created the world's number two enterprise applications software company with a mission to eventually topple SAP's as the number one application's business provider.

The hefty transaction—which was almost 66 percent higher than the initially offered share price in June 2003, and more than doubled the absolute total dollar amount during that same time—creates a company with more than 22,750 customers and nearly 50,000 employees. This accounts for the 5,000 predominantly PeopleSoft employees that were recently laid off (mostly from the redundant administrative and sales and marketing departments). Oracle hopes to use the more than $1 billion (USD) in revenue that PeopleSoft receives in maintenance fees, to revive Oracle's long sidelined and dwindling applications business. Oracle also seeks to reduce its reliance on database and enterprise infrastructure software, which accounts for about 80 percent or so of its sales at this stage.

This is Part One of an eight-part note.

Part Two will present the competitive response of SAP and Microsoft.

Part Three will discuss how competition involves infrastructure.

Part Four is a Reality Check.

Part Five will look at what Oracle gains.

Part Six will cover Oracle's acquisition history.

Part Seven is the SAP factor.

Part Eight will discuss challenges and make recommendations.

The Acquisition Fight

PeopleSoft and its erstwhile CEO, Craig Conway, repeatedly engaged in a "tooth and nail" battle to convince shareholders to refuse the takeover offer five times, before ultimately losing. A number of lawsuits and counter lawsuits ensued, as well as some tricky defensive mechanisms from PeopleSoft, such as the so-called "poison pill" shareholders' provision and some generous customer rebates, including up to five times the amount of license fees, totaling up to $2.4 billion (USD). The so-called customers assurance program (CAP) was also created to protect customers in case Oracle discontinues PeopleSoft products, as it threatened to do in the initial onslaught of trash-talking between the PeopleSoft and Oracle CEOs at the time, both who are said to have a personal history and mutual animosity.

In early in 2004, the US Department of Justice (DOJ) announced its intention to block the Oracle bid on antitrust grounds, believing the merger would reduce competition and product innovation, and increase software prices. However, through testimonies from both parties, the trial revealed that many vendors currently offer steep discounts in the buyers' market in order to clinch deals. In some cases, up to 90 percent of license costs are discounted. It also revealed that no major vendor has proven immune to the many botched implementations. By the fall of 2004, momentum shifted in Oracle's direction when a federal judge rejected the Justice Department's claims, thus clearing the way for Oracle to pursue PeopleSoft. The "writing on the wall" that the deal would close (subject to an acceptable price) became apparent when PeopleSoft's board abruptly fired Conway on October 1, in part for his alleged deceptive disclosure tactics towards investors. He was replaced with PeopleSoft founder Dave Duffield. That same month, Oracle persuaded European Union officials to approve its offer and in November, Oracle got 61 percent of PeopleSoft shareholders to tender their shares.

Having finally moved past the hurdles of the hostile acquisition, Oracle revealed how its combined Oracle and PeopleSoft workforce will provide unparalleled innovation and support to 23,000 applications customers throughout the world. In January, top management spoke to a worldwide audience of customers and partners, with more than 17,000 joining by Web-cast and phone, including 1,300 Oracle and PeopleSoft partners. At the event, held at Oracle's headquarters, CEO Larry Ellison and his top executives showcased the new organization of the application; product and global support plans; and discussed Oracle's market share strength, particularly in specific industries. Executives also commented on the speed at which Oracle has moved to support users of Oracle, PeopleSoft, and J.D. Edwards application software.

Oracle Product Strategy

Ellison first outlined the companies' revised product strategy and vision, stating the company will continue supporting PeopleSoft product lines until 2013 and its commitment to release PeopleSoft Enterprise 9.0. By retaining over 90 percent of PeopleSoft's development and support organization, Oracle believes it can deliver its rather difficult commitment to all of its applications customers. Ellison also announced Project Fusion, which senior vice president of applications development, John Wookey, expanded upon.

Project Fusion is hailed as a new information age architecture based on modularized, open industry standards to allow reasonably more flexible deployment, optimized performance, and easy maintenance. Its architecture will leverage the latest Oracle technology for scalability, availability, security, and performance supporting the best features, flows, and usability traits of the Oracle E-Business Suite, PeopleSoft Enterprise, PeopleSoft EntepriseOne (i.e., J.D. Edwards OneWorld) and PeopleSoft World (i.e., J.D. Edwards World Software) products. For more information, see Oracle Further Orchestrates Its SOA Forays. Purportedly incorporating key strengths of all product lines, Oracle will focus on business process automation, and offer industry-specific capabilities and superior usability; access to near real time information and reporting; and shared data model to give customers a single source of truth. Oracle touts that the new architecture and the results felt by companies will be truly revolutionary, and an evolutionary path to the new successor product.

Wookey reiterated Oracle's plan to further enhance and support future versions of PeopleSoft and J.D. Edwards products and provided an estimated release timeline:

• PeopleSoft Enterprise 8.9 in 2005
• Oracle E-Business Suite 12 in 2006
• PeopleSoft Enterprise 9 in 2006
• J.D. Edwards EnterpriseOne 8.12 in 2006, and
• Ongoing J.D. Edwards World enhancements are planned to be delivered continuously.

In other words, 2005 will be the year of completing the current releases. PeopleSoft 8.9, J.D. Edwards EnterpriseOne 8.11, and Oracle E-Business Suite 11i.10 are among the product releases slated for shipment. PeopleSoft 9.0, J.D. Edwards EnterpriseOne 8.12, and Oracle E-Business Suite 12.0 product releases will debut in 2006. Additionally, The Project Fusion Architecture blueprint is scheduled to appear in 2005 with its first components, specifically data integration hubs and transaction bases, beginning in 2006, and the initial release of Project Fusion-based applications will be released the following year, in 2007. The application suite is planned for 2008. Meanwhile, Oracle has pledged to provide support for the PeopleSoft Enterprise, J.D. Edwards EnterpriseOne, and J.D. Edwards World product lines through at least 2013, while the vendor is extending the J.D. Edwards EnterpriseOne XE and 8.0 product releases support to February 2007. For PeopleSoft's other products and versions, including JD Edwards World, PeopleSoft's current retirement policies have been adopted.

Oracle will also continue to maintain currently supported hardware platforms, databases, and operating systems (OS). In addition to maintaining the PeopleSoft applications, Oracle will support IBM and Microsoft database technology and IBM and BEA Systems middleware as support for the IBM WebSphere infrastructure platform is especially pertinent to the former J.D. Edwards products. Despite these assurances, there is still uncertainty surrounding other IBM issues. In particular, the status of a major joint development and marketing deal between PeopleSoft and IBM, is still unclear. The deal, confirmed between PeopleSoft and IBM last September during the PeopleSoft Connect user conference, was not signed before PeopleSoft was acquired, which calls into question whether deal will materialize under Oracle.

Oracle Outlines Benefits

Unlike what happened between Oracle and PeopleSoft, the June 2003 PeopleSoft/J.D. Edwards merger was well thought-out and friendly and took customers' concerns into consideration. In contrast, Oracle's shotgun wedding-type move initially appeared as an attempt to hijack PeopleSoft's customer base and eliminate the vendor as a competitor. Moreover, hate had grown between the two vendors over the long period of neck-to-neck competition for almost every new enterprise applications deal. Consequently, when Oracle announced its acquisition of PeopleSoft, there was no indication of the future of PeopleSoft World customers, all of whom run on the IBM eServer iSeries (AS/400) OS environment. This caused some to surmise that the group would be sold. Mildly put, this was a point of concern for World customers.

As damage control, Oracle has reached out to more than 4,500 PeopleSoft and J.D. Edwards customers over the past few months, and many are reportedly embracing the commitment, stability, and strength of the world's largest enterprise software maker—one with a projected annual revenue of $13 billion (USD). They have been further placated by Oracle explicit statement that it does not intend to sell off the World business. Customers are also being wooed with other benefits, set in paper. These include

• One of the largest applications research and development (R&D) organizations. This newly assembled applications "dream team" of 8,000 application developers, including more than 3,000 from PeopleSoft, who will work together to deliver the most modern, Java-based, service-oriented architecture (SOA) available. They will continue to develop Oracle applications and the next releases of PeopleSoft and J.D. Edwards software.
  
  
• The combined industry expertise and market leadership of each company. With market leadership in many major industries—including communications, financial services, media and entertainment, and the public sector—the combined companies will have more than 6,000 application consultants. This includes more than 1,000 from PeopleSoft, as Oracle has reportedly extended jobs to 90 percent of the PeopleSoft consulting staff.
  
  
• Around-the-clock support and services available in twenty-seven languages (as opposed to PeopleSoft's nine) and in more than ninety countries. Oracle's support organization will combine with PeopleSoft's technical support talent to back Oracle's commitment to provide outstanding support to PeopleSoft and J.D. Edwards software users. Support staff will consist of more than 6,000 people in 16 global support centers. Under PeopleSoft, there were only six support centers.
  
  
• Strategy development in conjunction with customers to preserve their current information technology (IT) investments, and make room for competitive innovations. In the past year alone, Oracle reportedly interacted with nearly 2.5 million customers per month through events, conferences, education classes, and its web site.
  
  
• More than 1,300 applications partnerships around the world can help customers implement, tailor, and support their systems. The synergies created through these partnerships and the integration of Oracle and PeopleSoft should help accelerate growth into more industries, across broader geographies and channels, and into additional market segments.

Further, as part of its commitment to help organizations integrate and manage the complexity of handling disparate applications, in April Oracle announced a new middleware offering: Oracle Fusion Middleware and its corresponding roadmap for certifying PeopleSoft and J.D. Edwards applications. Oracle Fusion Middleware is a new umbrella brand for Oracle's vast family of existing middleware products, which includes a slew of the products needed to integrate a number of diverse business applications. These products include products in Oracle Application Server 10g, such as application development tools and Java 2 Enterprise Edition (J2EE) Application Server; Web services infrastructure; enterprise service buses (ESB) and integration; business process management (BPM) and business activity monitoring (BAM); business intelligence (BI) tools; security and identity management; enterprise portals and mobile applications. It also extends to data hubs and Oracle Collaboration Suite. All these products are currently used by thousands of customers and partners throughout the world.

As part of the company's initiative to make application integration easier for customers, Oracle Fusion Middleware aims to provide a more comprehensive, open, standards-based approach for deploying SOAs. By using Web services, an ESB, and Oracle BPEL Process Manager to implement SOAs, customers should more easily integrate heterogeneous business applications and automate business processes. Oracle's middleware supports the Oracle E-Business Suite, as well as other enterprise applications. Additionally, thousands of partner independent software vendors (ISV) use it to build their own custom applications.

Marking the next step in Project Fusion, Oracle plans to certify PeopleSoft and J.D. Edwards applications with Oracle Fusion Middleware products in second half of calendar 2005. It hopes that this will further demonstrate its commitment to moving customers towards information-age applications. To that end, customers should be able to use Oracle Fusion Middleware to support their entire enterprise including Oracle and non-Oracle business applications, custom applications developed by in-house IT staff and consultants, and the emerging broad array of standards-compliant enterprise services. As part of Oracle's commitment to PeopleSoft and J.D. Edwards customers, Oracle is also continuing to support its PeopleSoft Enterprise and JD Edwards EnterpriseOne product lines on platforms from other vendors including IBM and BEA.

In addition to being certified for use with Oracle's Java Application Server, PeopleSoft and J.D. Edwards applications will also be integrated with Oracle Portal, enabling customers to access Oracle E-Business Suite, PeopleSoft, and J.D. Edwards applications from a single Enterprise Portal. PeopleSoft and J.D. Edwards Applications will also be integrated with Oracle Identity Management, which will likely lower the cost of managing security for customers. Using Oracle BPEL Process Manager, a part of Oracle Fusion Middleware, customers should also be able to build and deploy business processes across heterogeneous applications, using application program interfaces (API) and Web service-enabled integration points from PeopleSoft, J.D. Edwards, and the Oracle E-Business Suite. To facilitate the highest possible degree of interoperability, Oracle provides libraries of integration points for each product line and exposes these integration points in integration repositories. Both Oracle and PeopleSoft launched hosted services repositories in 2004, which provided customers with a single source of documentation for all Web service-enabled integration points. In 2005, local repositories will reportedly allow customers to connect application services with Oracle BPEL Process Manager to orchestrate business processes across multiple product lines.

Though informative, these announcements left some gaps, given that Retek, also acquired by Oracle came too late to the fold to be included in the current round of fusion plans. More importantly, the announcement omitted a vocal Fusion compliance for J.D. Edwards World, the IBM iSeries-based product that was J.D. Edward's mainstay prior to its acquisition. In all likelihood, support for the J2EE application server will probably be the first and least difficult step of what will otherwise be a challenging migration path.

In May, Oracle also announced that it has exercised purchase options to acquire PeopleSoft development centers based in Bangalore, India, which are operated by Hexaware Technologies Ltd. and Covansys Corporation. Originally granted under agreements entered into by former PeopleSoft in 2003, the purchase options, were acquired by Oracle in connection with the acquisition of PeopleSoft, Inc., in January 2005. The transfer of the two centers is scheduled for completion in late October 2005, and employees of these two centers are expected to become employees of Oracle.

Founded in 1990, Hexaware provides software services to the airlines, banking and financial services, insurance, and healthcare industries. Its global offices are located in New Jersey, Boston, Chicago, and San Jose US; Toronto and Montreal Canada; in the UK, Germany, Netherlands, and Belgium Europe; and Singapore in Asia-Pacific; Mumbai, Bangalore and Chennai in India. On the other hand, a leader in the public sector market, Covansys is also known for application maintenance and development outsourcing in the healthcare, financial services, retail and distribution, manufacturing, telecommunications and high-tech industries. Founded in 1985, with 6,000 consultants and employees worldwide, Covansys was one of the first US-based IT services companies to establish offshore facilities in India, and is reportedly a pioneer in seamlessly integrating offshore capabilities into its offerings.

However, despite Oracle's commitments to its old and newly acquired customers, and although its product roadmap is beginning to take shape, active marketing of PeopleSoft and J.D. Edwards product lines to new prospects have not been included. However, although the vendor continues to market these products to the installed base, while also attending user conferences, running campaigns, doing public relations and analyst relations around them as well. As a result, these products are being seen dead ends by some (at least in the long run), and many competitors are scrambling to offer all sorts of incentives for disconcerted customers to switch. As seen with the number of competitors' announcements prior, and especially after the merger Oracle can at least be vindicated for claiming that notable competition will still exist after its merger.

This concludes Part One of an eight-part note.

Part Two will present the competitive response of SAP and Microsoft.

Part Three will discuss how competition involves infrastructure.

Part Four is a reality check.

Part Five will look at what Oracle gains.

Part Six will cover Oracle's acquisition history.

Part Seven is the SAP factor.

Part Eight will discuss challenges and make recommendations.

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