February 17, 2004

February 17, 2004 | Commentary on Internet And Technology

PeopleSoft and Oracle: The Antitrust Dogs Turn

It was only a couple of years ago that Larry Ellison, the charismatic CEO of Oracle Corp., was urging the dogs of antitrust to chase down Bill Gates and Microsoft. How things have changed. Somewhere along the way, the pups got loose and turned on him. Now Oracle itself may wind up feeling the antitrust bite.

At issue is Oracle's effort to acquire PeopleSoft, a competing supplier of business software -- a move Justice Department staff members recently said they oppose.

Last June, Oracle put in a $5.1 billion bid for the company (since rising to $9.4 billion earlier this month.) The PeopleSoft board rejected the offer, setting off a classic takeover battle. The storyline was a simple one and one familiar to Ellison: a large, octopus-like software company versus a plucky rival fighting to survive.

A climactic PeopleSoft shareholder meeting to vote on Oracle's offer is set for late March. PeopleSoft's board adamantly opposes the acquisition and is urging shareholders to reject it. But even if shareholders approve, the deal must get past a pack of antitrust authorities, as state, federal, European and even Canadian regulators are investigating the takeover attempt. A federal decision may come within a few weeks. Things look bad for Oracle, with rumors flying that the Justice Department may file suit to block the acquisition.

The question for U.S. antitrust regulators is whether the merger would substantially lessen competition in the relevant market. But what exactly is the relevant market here? The bulk of Oracle's business is in databases, but PeopleSoft doesn't play in that field. The two do, however, go head-to-head in a lower-profile market known in the software industry as "ERP," -- "enterprise resource planning." Essentially, this is the provision of software to help businesses with such things as inventory, customer service and human resources.

As it turns out, neither Oracle nor PeopleSoft dominate this market. The leader is a German firm, SAP, which by one measure has 25 percent of that market. Oracle and PeopleSoft have around 7 percent each. Rather than reduce competition, combining the latter two could actually increase competition to SAP (a point that European authorities, who have been known to use competition laws to help local favorites, are unlikely to miss).

To get around inconvenient market-share numbers, some critics of the acquisition have urged a bit of market gerrymandering. Instead of looking at the whole ERP market, regulators would look at smaller fields such as inventory software, human resource software and the like. Then, looking specifically at parts of those market segments involving the largest firms -- those in the Fortune 1000 -- Oracle and PeopleSoft would appear dominant.

It seems pretty unlikely, though, that such artificially defined markets would tell you anything about competition. After all, ERP sub-markets, such as finance or inventory, involve similar expertise and resources. Dominating one may not mean much since providers in one can fairly easily offer others.

At the same time, the customers in these sub-markets are, by definition, the largest in the country. We're talking Generals Electric and Motors, firms unlikely to be pushed around.

However the market is sliced, it's unlikely that competition will be threatened. For one thing, the whole business of selling enterprise software is being challenged. Companies such as salesforce.com are providing businesses with on-line services instead of software. Other companies simply provide the services on an outsource basis.

And there's an elephant-in-the-living-room that's been overlooked so far: Microsoft, which has announced plans to pour billions into enterprise application software. Yes, customers may witness a head-to-head battle between Bill Gates and Larry Ellison. The competition, of course, promises to be intense.

Nevertheless, antitrust regulators may still stop the PeopleSoft acquisition. One is tempted not to feel too sorry for Oracle, as it was the first to set the hounds loose. Yet the real losers would be consumers, who would enjoy a slightly less efficient, slightly less vibrant, software industry.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies

Distributed nationally on the Knight-Ridder Tribune Business Wire.