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PeopleSoft's defense is a tricky business

Dan Gallagher

Jun 16, 2003

As PeopleSoft Inc. fights a hostile takeover attempt by rival Oracle Corp., the Pleasanton software vendor will be hard pressed to please all its constituencies.

Oracle's surprise $5.1 billion cash tender offer for PeopleSoft's shares, announced June 6, means wildly different things for the Tri- Valley company's customers, employees, business partners and shareholders. The first three groups would be the more likely losers in such a deal, although the latter group holds far more sway in evaluating the offer.

Most experts have dismissed the bid as inadequate - at its current price. Redwood City-based Oracle has offered to buy all of PeopleSoft's outstanding shares at $16 per share. This represents a 6 percent premium on PeopleSoft's closing price the day before the deal was announced, although the company was trading above the $16 mark before announcing plans earlier in the week to buy J.D. Edwards & Co. for $1.7 billion.

But cracks already are starting to appear among the various groups with a stake in PeopleSoft's fate. Customers have been told by consultants such as Gartner Inc. to hold off purchases, at least for the short term. One shareholder already has sued the company in an effort to force a closer look at the bid. And, one Wall Street analyst downgraded the company's stock, partially on the assumption that little work will get done in the crucial final weeks of the quarter as employees scramble to look for other jobs.

"I actually think (Oracle CEO) Larry Ellison has been very clever about this," said Ken Marlin of Marlin & Associates, a New York-based investment bank specializing in high-tech mergers. "He had to start someplace, so he gave an opening shot across the bow offering a 6 percent premium. Then he sort of signaled a willingness to up the price if he can talk directly to the board."

If the price goes up - Oracle as of press time has given no indication that it will - the pressure will grow on PeopleSoft's board of directors to consider a deal that, if successful, will essentially spell the end of the company in its current state. Ellison says he is mainly interested in PeopleSoft's customer base and would kill development of any future PeopleSoft applications, although current ones would be supported.

That likely would mean massive layoffs for employees in product development, R&D and most administrative functions that overlap with Oracle. The company has approximately 8,200 employees, about 3,500 of whom work out of the Pleasanton headquarters.

On June 12, PeopleSoft's board of directors formally rejected the Oracle bid, citing the low price and the belief that the deal, if consummated, would not pass antitrust scrutiny.

"We believe that Oracle's proposed acquisition of PeopleSoft would stifle competition and limit customer choice," PeopleSoft CEO Craig Conway said in a statement.

Conway, a former Oracle executive, met with Ellison last year to discuss a possible business combination, although the two differ widely in their recollections of those talks.

Despite the growing pressure, PeopleSoft is not without its defenses. The company has reportedly considered suing Oracle, although Oracle said in a June 10 statement that PeopleSoft pulled back from plans for a lawsuit. But some experts say PeopleSoft could have an actionable case under the view that, at $16 a share, Oracle's offer is more an effort to disrupt PeopleSoft's business than a serious effort to buy the company.

The company also has a longstanding shareholder rights plan, also known as a poison pill, that allows existing shareholders to buy additional shares of both common and preferred stock - which typically carries more powerful voting rights - if an entity buys 20 percent of the company's outstanding stock without negotiating with the board of directors.

Poison pills, which make hostile acquisitions prohibitively expensive for the buyer, serve as more of a pre-emptive deterrent; several experts contacted by the Business Times said they could not recall a situation in which such a plan was actually triggered.

But limited evidence suggests they are effective. Georgeson Shareholder, a New York-based firm that assists public companies in proxy matters, found that among acquisitions done between 1992 and 1996, companies with poison pills fetched a price 8 percent higher than companies without such plans.

In a public letter to PeopleSoft's board of directors, Ellison called on the board to rescind its poison pill and negotiate with him directly.

"It's pretty fair to say that Oracle has figured out that the poison pill can hurt them," said former PeopleSoft Chief Financial Officer Ron Codd, who established the company's shareholder rights plan in 1995. "I'm sure Larry's bankers have thoroughly analyzed the plan and came to the conclusion that they will have to get around it somehow."

But poison pill plans are controversial with some investors who see them as tools for management to look out for themselves. At least 90 companies are holding shareholder-initiated votes this year on repealing their poison pills, according to the Investor Responsibility Research Center.

PeopleSoft, already under fire from activist shareholders over the expensing of stock options, may be loath to rely on its poison pill as a defense, especially if Oracle increases its bid price.

"The facts of the matter are these poison pills are not enacted at the whim of management; they're enacted at the whim of the board. And the board clearly has a legal fiduciary responsibility to shareholders," said Marlin. "Larry has signaled a willingness to negotiate if the poison pill goes away. If the board simply rejects the offer and does not remove the pill, and he goes away, there's some people who will sue the board of directors."

At least one shareholder already has. Bernstein Liebhard & Lifshitz LLP, a New York law firm specializing in securities fraud litigation, said June 10 that it has filed a lawsuit in Delaware's Court of Chancery challenging the company's response to the Oracle bid. The firm warned PeopleSoft's directors to "act with a view toward maximizing shareholder value" and not rely on its poison pill or other defensive mechanisms.

"The public statements by Mr. Conway with regard to the Oracle offer to date suggest that the board has made a decision not to consider the offer based on little or no information," attorney Stanley Bernstein said in a statement. "If this is, in fact, the case, we believe such actions would amount to a breach of fiduciary duty under Delaware law."

Besides a poison pill, PeopleSoft also has a staggered board of directors, which means only few members of the board are up for re-election in a given year. This means a hostile bidder would need more time to stack the board with its own candidates.

"The two most effective antitakeover defenses are poison pills and staggered boards. In combination, they are the best defense against an unwanted bid at an unattractive price," said one individual working with PeopleSoft on its defense strategy. "The best defense, however, is an inadequate bid."

That leaves unanswered the question about how much higher Oracle is willing, or able, to go. Chuck Phillips, a former Morgan Stanley software analyst who was hired as an executive vice president for Oracle last month, said in a conference call that Oracle's offer of $16 a share was "a fair price for a company that isn't as strong as it once was."

Despite Oracle's fat wallet of $6 billion in cash, with another $5 billion credit line from Credit Suisse First Boston, some analysts are skeptical that the company has the ability to significantly increase the bid price. In a research note, W.R. Hambrecht Analyst Rich Petersen said the likely loss of several PeopleSoft customers - if the acquisition is successful - would decrease the company's contribution to Oracle's bottom line and therefore constrain its ability to service the debt for an acquisition at a higher price.

"As the debt service number at a $16/share offer roughly matches the contribution margin from an acquired PeopleSoft, we believe more likely than not ($16 per share) to be Oracle's real offer price," Petersen wrote. "Certainly, this scenario does not exhaust Oracle's financing options and other financing methods may enable Oracle to increase its offer price without facing dilution. However, it is certainly no 'slam dunk' for Oracle to do so." 

Reach Gallagher at dgallagher@bizjournals.com or 925-598-1450.