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Oct 17, 2004 11:25 pm Oracle 4 PeopleSoft
Melanie Hollands
Now that Craig Conway's been fired from PeopleSoft, it isn't the shareholders that count now - it's THE shareholder: Dave Duffield.

I don't know what Dave (the founder of PeopleSoft) wants with regard to the Oracle bid - he might want the deal to go through but I sort of doubt it (it probably would already have happened if he did). All the folks that I pinged to see what they knew did not answer back. My guess is they don't know either.

Dave, despite his calculated nice guy exterior (his email address, harkening back to when PeopleSoft was small enough that everyone used their initials, is dad@peoplesoft.com) is a hard hitter. It's more likely he grew tired of Craig's style after three years as CEO and wanted someone else to run his company - someone like, uh, him.

Craig is walking out with about $100 million in stock (not sure what his cost basis is) and options worth a pile too. He might not be able to afford the G-V (mogul lingo for Gulfstream Five) time-share, but something a little smaller is certainly affordable. Who knows - maybe Larry Ellison would hire him.

PeopleSoft went through a wrenching moment in 1998 as it started into the post Y2K abyss. There was a huge battle over whether it should continue spending money on R&D and let the earnings go to hell or not. The company compromised and created "Momentum Business Applications", the clever off-income-statement device that would never be allowed today. I never did find out where Dave stood on that issue – but it would be a good clue as to what he wants to do now.

It’s interesting as the company also indicated what the revenues would be – it had to because otherwise everyone would have assumed Craig was getting the axe because of a revenue shortfall. I was using $160 million for the current quarter's license revenues - $20 million higher than the highest analyst number on the Street, and closer than anyone to the actual number. If I were to grow horns and be a sell side analyst once again I never would have used that number because there was nothing in it for me especially if I was neutral on the stock. (Neutral and a way high number would ensure that Cap Research would not have given me a vote for another five years.) I probably would have been at $140 million, though.

Not sure what's going on at FILE. Couple of analysts dropped their rating going into the last day of the quarter. Interesting to see if they pre announce. If they don't then my guess those guys are wrong and they come in at or above the license revenue median.

The likelihood of Oracle’s hostile bid for PeopleSoft being successful is higher now; all the more so since Oracle plans to ask the chancery court in Delaware to remove two “poison pills” in PeopleSoft’s capital structure. Oracle claims these poison pills have been used by PeopleSoft to block its $7.7 billion bid at the expense of PeopleSoft’s shareholders.

A poison pill (also called a poison pill defense) is a slang term for a finance tactic a company can use to defend itself against a hostile takeover. Usually, the poison pill takes the form of an issue of convertible preferred stock issued as a stock dividend to shareholders. This preferred stock is convertible into a number of common shares, but due to the dividend adjustments shareholders don’t have incentive to convert the preferred stock unless there is a hostile takeover. Consequently, the hostile bid (such as Oracle’s) becomes its own poison pill since it significantly increases the price that would need to be paid for the target company (PeopleSoft).

Former PeopleSoft CEO, Craig Conway's vehement opposition to Oracle’s tender offer has brought criticism from Oracle, as well as some quarters of the investment community. Some believe Conway should not have rejected the offer on the day it was launched and before the PeopleSoft board of directors had had time to consider it. I have argued in this column that I think the merger is bad for the ERP business, and that it’s unlikely to go through (although it looks more likely now); but I have also argued that from a purely financial perspective Oracle’s offer makes sense for PSFT shareholders - $21 per share is considerably more than the company is worth (around $16 per share, tops in my opinion).

Speculation has been rife that Conway was fired due to his opposition to the bid. However, when he was fired PeopleSoft said that it had lost confidence in him as CEO, despite the fact that management also disclosed that sales of PeopleSoft’s new software licenses for the current quarter were (so far) higher than expected.

The market reacted favorably to news of Conway’s firing and PSFT shares jumped nearly 15% on Friday, October 1. In addition, news that the Department of Justice would not appeal against the August court ruling that overturned efforts to block a takeover on antitrust grounds contributed to the rally in PSFT. The European Union is also expected to drop its opposition to Oracle’s bid.

PeopleSoft's poison pill was one of the company’s last defenses against Oracle’s tender offer. But Oracle has asked the chancery court of Delaware (where many US companies are registered) to overturn two of PeopleSoft's defenses. One is the poison pill, which is essentially a shareholder rights plan put in place as a defense against unwanted takeover attempts. The second is a provision PeopleSoft has been including in its new software sales contracts since 2003 (after Oracle’s bid was announced) that could provide guaranteed compensation to PeopleSoft customers in the event the company is taken over. Aggregate payments to PeopleSoft customers under this provision could exceed $2 billion, which makes a takeover by Oracle less attractive. If one (or both) of these two defense tactics is overruled by the court this could remove the last obstacles to a takeover by Oracle.


Melanie Hollands
Koala Capital, LLC

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