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Larry Ellison and the art of war

By David Kirkpatrick

Larry Ellison
Larry Ellison

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(FORTUNE.COM) -- Thank you, Larry Ellison. You've just inaugurated another extended period of technology industry drama. Oracle's hostile bid to pay $5.1 billion in cash for enterprise software company PeopleSoft may not generate quite the chaos as Hewlett-Packard's prolonged merger dance with Compaq, but then again it might get close. After all, that saga had no character quite so colorful-and quotable-as you.

So, to all who follow the tech world, buckle your seat belts and prepare for more from the CEO of Oracle along the following lines (from an interview last Friday): "We're after their people, their customers, and we're after money...We'll get hundreds of millions in savings by buying PeopleSoft, and that might be understated. [Never, Larry]...We're going through a phase of consolidation, no question about it...The best companies will be the giants-the Microsofts, the Oracles, the HPs, the Suns, the SAPs-the survivors, and they will buy the tier below them, PeopleSoft and companies like that. But there is another tier below that-like i2. You have to figure out who gets bought and who just evaporates. There will be more that evaporate, like Ariba, Commerce One, and i2...Siebel's the last of the best of breed companies and I'm not a big fan. Best of breed is dead, except for dog shows."

You gotta love stuff like that, unless you're a PeopleSoft employee. And as we in the press began trying to figure out whether Ellison really wants to buy PeopleSoft, or perhaps just wanted to mess it up by creating a prolonged period of uncertainty, we were already having a field day of reporting, analysis, and speculation. Another clear win from this new situation is that it puts more focus on the importance of enterprise software, a category of technology few businesspeople have ever bothered to understand. Yet it is increasingly the lubricant which allows the gears of modern business to move.

Just to recap: Early last week PeopleSoft announced it was buying the smaller J.D. Edwards. Combining these two firms would create a company with enterprise software sales slightly larger than those of Oracle, which would then move down to number three in the industry. (SAP remains the industry colossus, with license revenues greater than the next six enterprise software companies combined.) Oracle's main business of selling the databases that all of these products typically run on top of would not be affected much.

Then a few days later, Oracle launched its own counterattack, saying it wanted to buy PeopleSoft for $16 a share, a slight premium from its trading price a day earlier. But the market, apparently calculating that this was just the first salvo in a bidding war, pushed PeopleSoft's stock up to about $18. Ellison says he has no intention of continuing to sell PeopleSoft products, but only, as he said above, wants to incorporate its best developers and salespeople into Oracle's ranks. He plans to take PeopleSoft's best features, especially those from its vaunted Human Resources applications, and incorporate them into Oracle's "e-Business Suite." He says he expects that PeopleSoft's customers will ultimately upgrade to Oracle products. Whether he might follow through on PeopleSoft's plan to buy J.D. Edwards if he buys PeopleSoft remains unknown, perhaps even to him. In any case, SAP would easily remain number one in applications even if Oracle folded PeopleSoft's business into its own.

Here's one possible scenario: Oracle's bid for PeopleSoft causes many of its and J.D. Edwards' customers to put purchase decisions on hold, something a variety of industry analysts have already recommended in the face of the current uncertainty. That sabotages both companies' third-quarter sales and profits, leading them to put out earnings warnings to Wall Street. In its infinite capacity for rapid and rash short-term reaction, the Street sells off the stock. So long as Ellison retains his offer, it hurts PeopleSoft's business and becomes essentially a floor to the stock price. The biggest risk for shareholders becomes that he might withdraw it. That creates an incentive for them to tender their shares. Shareholders eventually have no choice but to accept Oracle's offer. Says Ellison: "I think the deal will get done quickly, and at $16 a share. I know the market thinks the stock's worth much more, but then the market once thought that Ariba was worth more than Daimler Chrysler." He may have put himself into a position where he can effectively dictate the stock's price.

Ellison is a brilliant tactician, and a heartless one. His approach suggests he ascribes no value to the company brand, product line, and style of doing business that PeopleSoft founder Dave Duffield and his successor Craig Conway have built. PeopleSoft is, like its products, considerably more people-centric and "soft" than Oracle's notoriously edgy and cold corporate culture, where winning matters most and where one of the industry's most aggressive sales cultures has thrived for decades. That's why Conway will fight this bid tooth and nail, as he has made clear. Says longtime Ellison protégé Marc Benioff, who now, having studied at the master's feet, deftly feeds the press bon mots about his own enterprise software company, "Larry's the Sun Tzu of the software industry. He's all about the software war. This is a typical Larry Ellison Sun Tzu move. This could be real, it could not be real, but it is clearly defocusing for PeopleSoft." It's always possible, however, that Conway, himself a longtime Ellison student as a top executive at Oracle, may come up with a clever counterstrategy-like, say, a white knight bid from IBM. Or maybe a successful lawsuit.

So what's the view from SAP, the company everybody is desperately trying to bulk up to match? "We don't think customers will stay loyal to Oracle after they buy PeopleSoft in a hostile takeover," SAP Executive Board Member Shai Agassi told me. "Customers usually get hurt in that situation. Buying market share is not such a smart idea." Agassi says SAP's market share now stands at about 54%, up from 34% two years ago. "We're gaining about 3% to 4% market share every quarter," he says confidently.

No wonder this industry is consolidating. We could be heading toward a Microsoft Office-like market, with one giant and lots of little nobodies. Adds Agassi: "We have the unfair ability to amortize our investments across a larger collection of customers, which allows us to invest a lot more than our competitors." SAP has 8,000 developers in R&D, far more than any other player (except Microsoft, which remains focused only on the low end of this market).

"The thing most people don't realize," Agassi continues, "is that almost no customer installs an enterprise application unedited out of the box without any modifications. The customization is what allows you to run your business. So there won't be a magic script that will allow you to convert your PeopleSoft application into Oracle. For customers there will be a cost of conversion. But if you're going into a second marriage you might as well consider who you're getting married to." In other words, for all of Ellison's machinations, the SAP view is that the more he makes waves, the better it is for them. SAP has already launched a campaign to lure the other companies' customers

Party on, boys.

David Kirkpatrick is senior editor for Internet and technology. Questions? Comments? E-mail them to

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