Oracle, PeopleSoft Agree to $10.3B Merger

Ending 18 months of bad blood, Oracle Corp. (ORCL) raised its takeover bid for bitter rival PeopleSoft Inc. (PSFT) 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.

"This is a major turning point for the entire enterprise software industry," Oracle co-president Charles Phillips said during a Monday conference call with investors.

Shares of both companies rose in early trading on the Nasdaq Stock Market (search). PeopleSoft shares gained $2.47, or 10.3 percent, to $26.42 while Oracle shares were up $1.15, or 8.7 percent, at $14.43.

By picking up 12,750 PeopleSoft customers and more than $2 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. Oracle plans to complete the takeover next month.

"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, Oracle CEO Larry Ellison (search) assured analysts during a conference call Monday.

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.

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.

News of the long-delayed 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 had stubbornly resisted Oracle's overtures, maintaining that it could do a better job taking care of its customers than its longtime rival.

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 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 (search), 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 told analysts Monday.

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.