Prepared by

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Oracle vs. Peoplesoft Case study MA Law
Prepared by Ekaterina Kouznetsova Alexander
Nagornov Serhat Uysal Alexander Parkhomenko
December 2007
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Background of the acquisition

• Consolidation trend in the industry
• Competition with SAP intention to gain a strong
  position as No. 2
• Expand customer base
• Acquisition of technology, software and engineers
• Previously
• Failed merger plans between Peoplesoft and Oracle
  in 2002

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A Bit of Financial Math

• Was the bid timely? Surprisingly, yes.
• Bubble had completely burst a slow but
  stable growth was looming

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A Bit of Financial Math

• Was it economically justified to look for
  PeopleSoft?
• First, everything is just a question of price.
• But at least we should look at some basic key
  ratios

Oracle (2004(2003)) PeopleSoft (2003)
Operating margin 38.0 (36.3) 5.14
Net income margin 26.3 (24.3) 3.75
EPS 0.5 0.6 (expected)

• PeopleSoft CFs from operating activities are not
  sufficient to cover investing and financing
  activities (as sum for 3 years).
• Oracle uses the cash from operating activities
  to repurchase common stock.
• Bottom line
• absolutely no pure financial reasons to buy
  PeopleSoft
• the only reason market strategy (customer base,
  technology)
• it seems that Oracle had some excess cash and
  willingness to invest it to demonstrate
  shareholders growth concerns

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Timeline and highlights of the acquisition
February - September 2004 - DOJ blocks the
deal. - Oracle lowers bid to USD 21. - Appeal
to the court deal is approved
June 18, 2003 Oracle s second bid USD 19.50
per share We are serious
Final bid USD 26.50 is accepted. Litigations are
terminated.
June 6, 2006 Oracle s first bid USD 16.00 per
share
October 2004 - Oracle asks Delaware court to
remove poison pill and CAP - Oracles new bid
USD 24
November 2003 - Proxy fight attempts for March
2004 annual meeting - New bid USD 26 per
share - Department of Justice deciding on
blocking the deal as anti-competitive
7 June 2003 Implementation of CAP and
announcement of poison pill
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Fair price vs First Bid

• Company plummeting profits, shrinking sales,
  involvement in MA
• Pre-trading price 15
• Initial bid - 16 -- too low!!!
• Given average premium of 40-50 - 19-22
• Oracle - inconsistent strategy raised bid to
  normal in two weeks. It seems that Oracle just
  wanted to buy.
• Generally managers spend the money of
  shareholders conflict of incentives
• Notion of game theory is crucial for the process
  of negotiating

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Implementation of CAP and Poison Pill

• 7 June 2003
• Customer Assurance Program
• Although it was argued that CAP is a new kind of
  poison bill, Peoplesoft repeatedly claimed that
  it is just for customer assurance, blocking the
  deal is not the motivation.
• Unlike Poison pill, CAP had a binding effect and
  it is not possible to pull back
• The liabilities created by CAP may had a negative
  effect on valuation
• Oracle, initially didnt worry about the CAP,
  however, the CAP liability continued to accrue at
  a ferocious pace which made Oracle to think about
  possible ways to remove it.
• Poison Pill
• Flip in Poison Pill If a single shareholder
  acquired over 20 of Peoplesofts stock, the
  company would issue new shares to the existing
  shareholders at a discounted price
• Poison pills do not directly block a possible
  merger but made it much more expensive for the
  acquiring company.
• As no shareholders approval is required to issue,
  Poison Pills can be removed by board decision at
  any time

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Proxy Fight

• November 2003
• Proxy fight Oracle nominates five candidates for
  the Board of Directors (consisting of 8 members)
  for the coming annual meeting of Peoplesoft in
  March 2004
• Main purpose remove the poison pill and approve
  the takeover
• How increasing the board to nine members through
  amendments to bylaws
• Oracle makes a new bid of USD 26 per share (from
  USD 19) to gain shareholders support and prove
  itself serious. Appeal to lets get this deal
  done shareholders group
• Meanwhile, the Department of Justice is deciding
  on whether to block the deal as anti-competitive.
  In light of this litigation, Oracle withdraws the
  candidates and decides not to proceed with proxy
  fight.

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Proxy Fight

• Advised action
• Since the court didnt judge yet, Oracle
  shouldnt have withdrawn from proxy fight.
• Possibility to get some candidates elected, if
  not all five
• If the deal is approved by the court, immediate
  action can be taken to remove the poison pill by
  the Board of Directors and approve a merger at a
  bid price of USD 26 per share
• Peoplesoft hiding behind decision of Department
  of Justice and rejecting the offer. Even though
  initially Department of Justice blocked the deal,
  the decision was overruled later by the court
  and Oracle could have influenced decision though
  the Board of Directors if it proceeded with the
  proxy contest

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Delaware Court

• October 2004
• Following the decision on Antitrust, Oracle sued
  PeopleSoft in the Delaware Court of Chancery
  seeking the removal of the poison pill and the
  injunction to stop the CAP program
• Poison Pill Court would evaluate the validity of
  the Poison pill under two criteria defined on
  Unocal vs. Mesa Petroleum case
• The hostile bid must present a threat to
  company
• Defensive response (Poison Pill) must be
  reasonable in relation to thread posed
• It was generally argued that the bid is not a
  threat to company since it is a fully-financed,
  all cash offer for 100 of the shares and
  shareholders has enough time to consider the
  offer
• However the second criteria, reasonableness, was
  not clear. Delaware case-law, generally finds the
  pill reasonable
• CAP Oracles argument was that the CAP was also
  a poison pill and must be reviewed based on
  Unocal criteria, while Peoplesoft argued that the
  CAP was just to assure customers.
• In Quickturn vs. Mentor Graphics decision, the
  Delaware Supreme Court opinion was that a board
  cannot tie the hands of a future board. To the
  extent that a contract purports to require a
  board to act or not act in such a fashion as to
  limit the exercise of fiduciary duties, it is
  invalid and unenforceable

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Delaware Court
October 2004 Before court decided, Oracle was
asked to put an unconditional offer on to the
table The offer was increased from 21 to 24
per share and Oracle declared that this was the
final offer and that the offer would be withdrawn
unless the majority of the shareholders tendered
their shares by November 19th. Peoplesoft
immediately declared that the offer was
unacceptable and recommended shareholders not to
tender. At the end of the tender period 61 of
Peoplesofts shares tendered. Although Oracle was
looking for an higher percentage to close the
deal, 61 was enough to keep them in the game and
re-consider the bid.
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Deal

• Board could not accept 24 as it rejected 26
  before, so it rejects 24 as inadequate
• As it became evident after 17 months PeopleSoft
  can get a 30-50 downside as Oracle walks away
  or Strine removes the pill
• 4th Quarter PeopleSoft fundamentals might
  plummet in 4th quarter as most of their clients
  re-contract at this time
• 61 shares tendered at 24 Oracle still in the
  game
• Large Shareholder approaches Battle to negotiate
  a counteroffer of 26.5 with Oracle
• Oracle gives 26.5, PeopleSoft board accepts

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Aftermath

• 18 months too long
• Shareholders threshold price was 19-22
• Pre-trading - 15
• Paid 26.5
• --------------------------------------------------
  ---------------------------------
• Initial bid of 16 was too low
• Inconsistent Oracle strategy in two weeks raised
  to 19.50
• Giving 26 just before DOJ said NO to the deal
• Next PeopleSofts Board will not accept bid
  lower than 26
• Deliberate pill trigger should have a strategy.
  Backward induction looking forward reasoning
  back
• Oracle did not negotiate with PeopleSoft board
  before bid, PeopleSoft board did not communicate
  later

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• Thank you