solution

Given that PeopleSoft was eventually acquired by Oracle at a price that PeopleSoft shareholders accepted, it might be argued that this case illustrates how the market for corporate control ought to work. What problems might nonetheless be found in the workings of the market for corporate control in this case? 200-500 words

Case: Oracle’s Hostile Bid for PeopleSoft

At a quickly convened board meeting on June 8, 2003, the directors of PeopleSoft considered their response to an unsolicited takeover offer from Oracle Corporation. Two days prior, Oracle’s CEO, Lawrence J. (Larry) Ellison, announced that the company would seek to buy all of PeopleSoft’s stock in a deal worth $5.1 billion. Because the PeopleSoft executives who sat on the board had a vested interest in rejecting the offer, the board’s independent directors, who had no stake in the outcome, formed a committee to address the issues. In deciding whether to accept the offer and how to repel it if need be, their fiduciary duty was to act solely in the interest of PeopleSoft’s shareholders.

Planning the Hostile Bid

Oracle and PeopleSoft were companies that developed and installed software for Enterprise Resource Planning (ERP), which enables business customers to integrate all data processing in a company across functions. Instead of separate computer software for accounting, finance, human resources, manufacturing, supply chain management, customer orders, and the like, ERP provides a unified system that operates from a common database. A few companies dominated the ERP business, with SAP, Siebel, and J. D. Edwards being the other major providers. Typically, an ERP system represents a very large investment by a company, and the installation may take a year or more. During the three to four years’ period before a change to a next-generation system, support from the ERP provider is critical. Consequently, the choice of ERP systems is a matter of great importance to companies.

The 1990s was a period of growth in the ERP industry, but by 2003, the sales of systems were declining, and price competition was reducing profitability. Companies were able to expand primarily by branching out into new applications, which could be done most quickly by acquiring smaller companies. Accordingly, PeopleSoft entered into an agreement to purchase J. D. Edwards for $1.8 billion. Not only did the two companies’ products fit well together, but the merger of PeopleSoft and J. D. Edwards, which had 10 percent and 5 percent of the market, respectively, would enable the combined companies to exceed the 13 percent market share of Oracle. PeopleSoft announced the acquisition of J. D. Edwards on June 2, 2003.

Oracle had long considered PeopleSoft for an acquisition or merger. A year before the hostile bid, the two companies had engaged in talks that were eventually abandoned. However, Oracle anticipated a possible PeopleSoft acquisition of J. D. Edwards and had prepared a plan to be put into effect as soon as the acquisition was announced. Ellison was quoted in the Wall Street Journal as saying, “We’ve got this war game in the box. This has all been pre-scripted. If they launched on J. D. Edwards, we were going to launch on them.”⁸⁰⁷ The Oracle bid was unusual, though, in that the offer of $16 per share represented a mere 6 percent premium over the current price of PeopleSoft stock. Typically, a serious raider offers a premium of 20 percent or more. Furthermore, Oracle announced that it would not offer PeopleSoft applications to its customers but would seek to convert PeopleSoft’s customers to Oracle’s E-Business Suite. Although the merger would make Oracle the number two ERP, next only to SAP, Oracle seemed interested only in PeopleSoft’s customers and not its software or employees.

The PeopleSoft CEO, Craig Conway, saw the takeover bid merely as a ploy for preventing the company’s acquisition of J. D. Edwards and, at the same time, damaging PeopleSoft’s business. The deal for acquiring J. D. Edwards, which involved the trade of stock, depended on the ability of PeopleSoft to maintain its stock price. However, the Oracle offer was likely to deter new customers from purchasing PeopleSoft applications because of the uncertainty over the future of the company. In a press release, Conway said, “By making an offer with the acknowledged intent of eliminating PeopleSoft’s business, Oracle seeks to disrupt PeopleSoft’s efforts to complete new sales, thus effectively damaging PeopleSoft’s business even if Oracle never buys a single share of PeopleSoft Stock.”⁸⁰⁸ In private, Conway was more candid, deriding the bid as “classic Larry bad behavior” from “a company with a history of atrociously bad behavior.”⁸⁰⁹, ⁸¹⁰, ⁸¹¹, ⁸¹², ⁸¹³, ⁸¹⁴

Responding to the Bid and the Outcome

Conway was firmly against consideration of Oracle’s hostile bid. He told reporters that “there is no condition that I can even remotely imagine where PeopleSoft would be sold to Oracle.” However, the committee of independent board directors recognized that there were conditions under which it would be in the shareholders’ interest to sell the company. The relevant questions for their decision were, what are those conditions, and have they been met?

First, there was the matter of price. Was $16 per share a fair price for the company’s stock, or should the board hold out for a higher offer? In takeovers, a better price might be offered not only by the original suitor but by a rival raider. This rival might be a “white knight,” who makes a friendly offer to save the company from the clutches of an undesirable suitor. In takeovers, a bidder, like a house buyer, typically makes a low bid with the intent of raising the price eventually. On June 18, Oracle raised its offer to $19.50 a share, a 22 percent increase in the bid price and a 29 percent premium over the price on the day Oracle announced its hostile bid.

Second, what were Oracle’s intentions in making an offer for PeopleSoft? Larry Ellison strenuously denied that his intent was merely to harm PeopleSoft and derail the J. D. Edwards acquisition. To his critics, Ellison replied, “I’m a rich guy, and I think $5 billion is serious money.” He added, “We absolutely think this is going to happen.” Moreover, many analysts thought that an acquisition would strengthen Oracle by giving the company new products, new employees, and new customers. According to one observer, “Ellison has a vision of ensuring that Oracle is, to a large extent, a vertically integrated company that is equipped to offer virtually any business software product or service to customers.” However, if the price that Oracle was willing to pay was high enough to induce PeopleSoft shareholders to sell, should Oracle’s plans for the acquired company be of any concern to the board? If Oracle was not serious in acquiring and did not successfully absorb PeopleSoft, then it was Oracle’s shareholders who would bear the loss, not the former PeopleSoft shareholders.

Third, what would be the impact of selling PeopleSoft to Oracle on the company’s existing customers? Even if its customers eventually migrated to Oracle’s E-Business Suite, Oracle might not provide adequate maintenance and upgrades for the PeopleSoft applications that customers were currently running. One solution to this problem that the board of directors considered was a Customer Assurance Plan (CAP) that would reimburse customers from two to five times the original cost of their software if an acquirer failed to provide adequate service during the life of a system. Such a guarantee would reassure not only customers who had already purchased PeopleSoft applications but also companies shopping for new software. CAP would also be a costly commitment that would increase the cost of a takeover for the acquirer. Although CAP would be a benefit to PeopleSoft’s customers, the board had to consider whether it was in the best interest of the shareholders. Once in place, it probably could not be withdrawn by the board, and it might reduce the price that the shareholders could get for the company.

Fourth, the board had to assess the effect of Oracle’s bid on J. D. Edwards.If the acquisition of J. D. Edwards were not completed quickly, the opportunity might be lost, and J. D. Edwards shareholders would not be able to realize the gain they expected from the deal. The J. D. Edwards CEO declared, “Oracle’s unsolicited offer for PeopleSoft will only destroy value for our companies’ shareholders, customers and employees, and the technology community overall.” After the announcement of Oracle’s bid, J. D. Edwards filed a suit against Oracle alleging that Oracle had wrongfully interfered in the sale of J. D. Edwards to PeopleSoft. Because the purchase agreement involved payment with PeopleSoft stock, the deal required the approval of the PeopleSoft shareholders, which could not be gained quickly. However, the board had the option of buying J. D. Edwards for cash, which could be done without shareholder approval, and so the acquisition could be completed promptly. The question for the board, then, was whether to proceed with the J. D. Edwards acquisition and if so, how to do it.

If the PeopleSoft board were to accept Oracle’s offer, then it would need to rescind a “poison pill” that it had previously adopted as protection against a hostile takeover. The poison pill provided that in the event of an acquirer purchasing 20 percent of the stock, new shares would be issued to the shareholders at a low price. The effect of such a provision is to reduce the acquirer’s percentage below 20 percent, and this provision would be triggered each time an acquirer increased its stake above that level. If the board decided to accept a bid for the company, the poison pill could be eliminated by board action. Although this protection effectively ensured that a takeover could not occur through the purchase of stock without board approval, a hostile raider could still take the difficult and more time-consuming route of a proxy battle to elect its own members to the board, who would then rescind the poison pill.

What was the outcome?

The Outcome

At the board meeting on June 8, the directors concluded that they needed more information before making a decision, and so they adjourned and scheduled a meeting for June 11, at which time the board would address all of the issues facing them in responding to Oracle’s hostile bid. On June 11, the PeopleSoft directors rejected Oracle’s $16-per-share offer as too low and adopted a Customer Assurance Plan. In August 2003, PeopleSoft completed the acquisition of J. D. Edwards. Oracle and PeopleSoft engaged in extensive court battles over many issues, including the poison pill and CAP. During 18 months of skirmishing, Oracle raised its bid price five times, eventually offering $26.50 per share. On December 13, 2004, the PeopleSoft board announced that it would accept this offer. In the end, PeopleSoft was acquired by Oracle for $10.3 billion.