Introduction
It all kicked off on 6 June 2003, when Oracle ambushed PeopleSoft with a hostile takeover bid valued at $5.1 billion just four days after PeopleSoft agreed to a $1.8 billion deal with J.D. Edwards. The acquisition fight lasted over 18 months and has become a staple in business and law school case studies.
PeopleSoft specialized in Enterprise Resource Planning (ERP) software solutions. It was very strong in human resource software and other back-office functions, competing with SAP and Siebel; however, as the ERP space began to see dramatically reduced growth, PeopleSoft’s sales began to lag. Company leaders saw the acquisition of smaller J.D Edwards as a way to bolster and expand its business into enterprise management and supply chain solutions. Although this acquisition would place PeopleSoft in a better position to compete with market leaders, it never got a chance to enjoy the hype and excitement. Oracle announced its tender offer takeover of PeopleSoft and Oracle CEO, Larry Ellison, further announced that that the company would discontinue PeopleSoft products once the merger was complete (although product support for existing customers would continue). PeopleSoft faced significant challenges. The true intention of Oracle was unknown, and a personal conflict between the PeopleSoft and Oracle CEOs added complexity into the issue. The unwelcome tender offer cast a cloud of doubt upon PeopleSoft’s future and required that the board seriously consider Ellison’s offer.
Challenges of the Tender Offer
Since Oracle announced that they would discontinue development of PeopleSoft products if the acquisition went through, PeopleSoft’s customers, both existing and potential, became concerned about the ability to maintain a relationship with the company. With its future in question, PeopleSoft’s sales leads were allegedly being put on hold or simply evaporating. How to shore up the confidence of customers and stabilize the sales, therefore, became the most significant challenge. In addition, Oracle’s offer might delay or even destroy the merger between PeopleSoft and J.D. Edwards. Furthermore, Oracle’s hostile bid increased the volatility of PeopleSoft’s stock prices because of doubts about the company’s future. Indeed, SAP began marketing itself as the answer to the uncertain vacuum left by PeopleSoft as it fought its battle with Oracle, further depressing PeopleSoft’s stature.
A combined PeopleSoft-J.D. Edwards entity would eclipse Oracle in the industry and Ellison’s team reportedly had a contingency plan to prevent this. Specifically, they had fleshed out a plan to acquire PeopleSoft and or J.D. Edwards. Ellison was a very aggressive businessman, prone to flamboyant displays and hardnosed business tactics. There were many analysts who thought the rationale behind the offer was simply to spoil the PeopleSoft-J.D. Edwards deal, thereby weakening a direct competitor. While the ploy of spoiling a pending deal was plausible, certainly PeopleSoft’s board had to consider that the takeover offer might be genuine.
Management Reactions
Since the hostile bid posed direct threat to PeopleSoft’s existence, the management team’s priority would be focus on stabilizing the company’s operations in the aftermath of the unwelcome offer. It was essential to reassure existing and potential customers of PeopleSoft’s health, and to consider how to guarantee current and future products and services. Working to boost stock prices in order to increase shareholder wealth and make any takeover as unattractive as possible remained a clear focus for the team.
Stabilizing business operations and launching new products would show the industry that PeopleSoft was confident of its ability to provide shareholder and customer value going forward. A panicky reaction to the hostile bid would scare customers and raise their doubts about the company. The Management Team needed to communicate with customers and shareholders to explain PeopleSoft’s next-step plans. The board and management believed that the $16 per share ($5.1 bn) offer did not adequately value the company and therefore acceptance was not in shareholders’ interest. Assuming the board and management team were focused solely on building shareholder wealth, the priorities turned on determining whether the offer was genuine, and if so, obtaining a best offer from Oracle that clearly exceeded the forecast growth of the company as a standalone entity. In this case, even with the mere six percent industry growth rate forecast, PeopleSoft’s share price could be expected to top $16 within a year. Clearly, Oracle’s offer was not one to be taken seriously. However, it was a point at which negotiations could begin. Given that the case review indicated that the board believed that Oracle’s bid was a valid threat, but not one that fully valued the company, management turned to traditional antitakeover defenses to make Oracle’s goal unpalatable. Tactics included adoption of a poison pill defense and consideration of a Customer Assurance Program (CAP). The board’s strongly negative rejection of Oracle’s initial offer, continued negotiations to close the J.D. Edwards deal, and adoption of takeover defenses were designed to maintain a consistent and profitable operation and boost stock price to so that Oracle had to raise its offer price a lot if it wanted to acquire PeopleSoft, while incidentally maximizing shareholders’ benefits.
Independent directors’ Reactions and Strategies
Reaction to the hostile bid
The board established a group of independent directors, known as the transaction committee, whose role it was to chart a course of action in light of Oracle’s offer and the boards’ fiduciary obligation to shareholders. According to an academic study quoted in the paper, most hostile takeovers reported an average final bid premium of 43.2% and almost 40% of bids resulted in at least 50% premium. Therefore, the 6% premium offered by Oracle undervalued PeopleSoft and such offer definitely would not maximize shareholders’ benefits. “Just say No” to Oracle would be a most reasonable reaction at this stage, given PeopleSoft leaders’ belief that the offer was more aimed at spoiling the J.D. Edwards deal than actually acquiring their company. The board deliberated about several important items.
Factors Taken Into Consideration
1. Whether the premium was reasonable and could maximize shareholders’ benefit. As mention above, the 6% premium was too low to be accepted.
2. The intent of Oracle’s offer. Oracle announced the hostile bid just 4 days after PeopleSoft agreed a $1.8 billion deal with J.D. Edwards and stated it would not continue PeopleSoft’s product lines. In addition, the CEO of Oracle, Larry Ellison, had a history of questionable ethical issues, which compounded more doubts about the validity of this offer. If Oracle was not seriously interested in PeopleSoft, but just wanted to disrupt the J.D Edwards acquisition, this takeover would not be good for the development of PeopleSoft and would have negative influence on its financial performance.
3. Antitrust issues considered by the U.S. Department of Justice and the European Union, and the length of the deliberations (or judicial proceedings). A lengthy delay would drive customers away from PeopleSoft or the merged entity. The potential costs of Oracle’s bid would be large and would damage the shareholders’ benefit. If Oracle was serious, such damage should be taken in account in the premium, which it ultimately was, increasing to $19.5 per share, and finally to $26. If Oracle was not serious, such damage would further erode the relationship between PeopleSoft and its customers and would reduce revenues in the long run.
Importance of Oracle’s Sincerity
The intention behind Oracle’s bid for people soft was extremely significant in this case. However, it was hard to tell Oracle’s end goal at first glance. To tell if Oracle was serious, independent directors of PeopleSoft could have conveyed a clear message to Oracle that their offer price was too low and PeopleSoft would only be interested in an acquisition at a reasonable price. Interaction with Oracle and observation of their behavior would help the PeopleSoft’s directors to find hints of Oracle’s sincerity. A prolonged battle between PeopleSoft and Oracle would only benefit competitor in the ERP field. Therefore, if Oracle was serious about the acquisition, they would be responsive to PeopleSoft’s signals and avoid costly foot-dragging.
Strategy If Oracle Was Not serious
If Oracle is tender offer was merely an attempt to disrupt the J.D Edwards merger, the best strategy was to ensure the financial and strategic strength of PeopleSoft’s position. The company should pursue the merger with J.D. Edwards with alacrity, to cement its position as a powerful competitor in the ERP solution provider field. Consideration of both Poison Pill and CAP options would be considered to make any takeover attempts problematic for Oracle.
1. Stock Buy Back: PeopleSoft had over $400 mm in cash and cash equivalents. The company could have bought shares to bolster the company’s standing and increase the company’s treasure stock. They should also reach out to a third party investment bank to get an unbiased opinion of the company’s fair market valuation.
2. Continue the acquisition process with J.D. Edwards: Strengthen the relationship with J.D. Edward and show the potential synergies to be generated by the merger. This would yield a likely increase in shareholder wealth and customer value, and instill confidence. Such action would inform the financial markets of the faith that PeopleSoft had in its position.
3. Litigation: There were many controversial legal issues. PeopleSoft could raise an antitrust issue as a way to block Oracle, but directors would have to consider that the antitrust tactic might cost shareholders the opportunity to obtain a better offer from Oracle. On the other hand, J.D. Edwards could sue Oracle based upon allegations that Oracle deliberately sabotaged the friendly deal between J.D. and PeopleSoft. However, litigation would likely be a long and expensive process and a burden on shareholders.
4. White Knight: The board could actively search for a white knight that could offer a high premium and alleviate the growing conflict between PeopleSoft CEO Craig Conway and the board. PeopleSoft, as the number three player in the industry and with a full list of big clients, was likely an attractive target. Considering the market power Oracle would achieve after a successful acquisition of PeopleSoft, major competitors including SAP, Microsoft might act in order to ensure that such a deal never occurred.
5. Review possible antitakeover defenses such as a flip-in poison pill and the CAP. PeopleSoft’s original pill had been established in 1995. A review of its terms and consequences of triggering should have been a priority for the board.
Strategies If Oracle Was Serious
If Oracle was serious about the takeover bid, the board of directors of both organizations should immediately reach out to M&A professionals to help with the valuation process and acquire a fairness opinion. Bearing the fiduciary duty in mind, the directors should monitor the situation changes and make decisions accordingly and objectively. Both the Poison Pill and the CAP are protective measures and bargaining chips in the process. The board held the ability to rescind the Poison Pill or adopt the CAP program, as long as it is in the shareholder’s interest. Directors of PeopleSoft would need to extract the best offer from any acquirer ensuring that the premium paid maximized benefits to their shareholders..
Poison Pill
PeopleSoft had a rights plan or “Poison Pill” of “flip-in” variety in place to defend against hostile takeovers. . If a single shareholder acquired over 20% of PeopleSoft’s stocks, the poison pill would be triggered and the company would issue new shares to existing shareholders at a heavily discounted price. Issuance of shares would continue until the would-be acquirer’s shares were diluted by 50 percent. Since the pill could be triggered multiple times, this would effectively block any acquisition of PeopleSoft unless the board approved the merger and rescinded the pill. According to recent research, poison pills have a negative effect on shareholders’ wealth because a firm with poison pill is considered a more difficult target to takeover. However, firms that are armed with a poison pill and ultimately taken over enjoy a higher premium paid for their stock. A poison pill can be an effective antitakeover strategy. The board of directors, representing shareholders’ benefit, can use such defenses as bargaining chips to gain higher premium. Of note, while the board can redeem the pill if it determines an offer is in the best interest of the shareholders, it can also deter some possible bidders as it can concentrate too much power in the hands of the directors. Secondly, almost all bidders challenge the legitimacy of a target’s poison pill in court, where the litigation burden can be considerable. Finally, it can entrench the management team, alienating some investors including arbitrageurs and institutions.
Guhan Sabramanian analyzed the PeopleSoft Pill defense in 2006, discovering some very enlightening facts. Specifically Sabramanian argued that had Oracle deliberately triggered the Poison Pill, the PeopleSoft deal could have been accomplished for up to $1.4 bn less. He offered a detailed analysis that showed that the board of PeopleSoft, with the built in ten-day window to modify or redeem the pill, would not have allowed the pill to be triggered. The subsequent $58.8 billion dollar cash inflow from six million new shares would have been an insurmountable drag on the company’s ROA, ROE, and all other accounting measures. It would also have been the largest equity offering of all time, taxing the capital market’s ability to fund such an issuance. Indeed, the pill was never designed to be so potent, but in the eight years since its creation, when stock traded at $33-$34, the board had never revisited its exercise price and so the value of the rights increased from eleven to twenty-four shares for each share of stock owned. In short, the board might have protested, but they would have reached a negotiated settlement. The figure below demonstrates the decision tree Oracle was faced with in the fall of 2004, with the current offer standing at $19.50. Research showed the market-clearing price for PeopleSoft was ~ $21 at the time.

Customer Assurance Program (CAP)
CAP entitled customers a money back guarantee of two to five times what they paid for the software in the event that PeopleSoft was acquired by a company that did not maintain or continue the PeopleSoft products. Depending on how the CAP was structured and the extent to which an acquiring company supported PeopleSoft products, the assurance plan could create potential liabilities of more than $2 billion. The CAP was enacted by the board to shore up lagging sales due to uncertain future support. The program also made any takeover attempt much more expensive. In total, there were four revisions to the PeopleSoft CAP, each designed to make acquisition more difficult for Oracle. Unlike the poison pill, the CAP could not be rescinded by the board because it represented a contractual obligation to customers. However, it was not permanent; the final CAP version expired in March 2004. In addition, CAP would only be triggered if Oracle failed to provide agreed support. The CAP did function much as a poison pill. It created a situation where in an acquiring firm could become financially liable for a large sum. In this case, the CAP created possible legal objections because it was not created “on a clear day”, but only after Ellison declared that Oracle did not plan to continue developing or supporting PeopleSoft products in the future. PeopleSoft subsequently crafted a series of CAP contracts that were specifically designed to stymie Oracle’s takeover efforts. If Oracle carried out its plan to cease supporting legacy PeopleSoft products, it would have activated the CAP, thus incurring the obligation, much as a poison pill creates a financial hurdle. Like the poison pill, once triggered, it could not be removed. Unlike the pill, once the CAP contracts had been issued to customers, the board lost the ability to rescind them. PeopleSoft’s pill provided a ten day consideration period where in the board could modify or rescind the pill before it took effect. The CAP’s ability to increase Oracle’s takeover bid to get shareholders a higher premium was questionable, and comments in the press indicated it was never a permanent obstacle for Oracle. However, such a policy could have scared off any potential white knight or other friendly bidders in the future.
Conflict of Interests
In this case, the pedigree of PeopleSoft’s CEO, Craig Conway, included his previous employment with Oracle, reporting to Larry Ellison. There was great friction between the two executives, to the point where the PeopleSoft board had to direct Conway to cease making comments that exposed the board to Director & Officer claims of violation of fiduciary responsibility. Specifically, Conway repeatedly indicated there was no price at which PeopleSoft would sell to Oracle. The conflict between manager and board ultimately resulted in Conway’s removal in October 2004. Generally, CEOs of acquired organizations seldom stay in control of new companies and may have difficulty in finding another executive role. Therefore managers, out of self-interest, pride or ego, may be against the acquisition even though the bidder offers a good price In this case, the CEO of PeopleSoft, Conway, bore personal ill will toward Oracle’s Ellison and stated that he would fend off Oracle’s acquisition anyway possible. Such grandstanding raised concern on the PeopleSoft Board. The potential cost of the conflict between the PeopleSoft CEO and its board was high. The conflict sent out misleading signals to Oracle, J.D. Edwards and shareholders about who was in charge within PeopleSoft. This uncertainty harbored suspicions, promoted irrational behavior and complicated the future of the deal. The conflict would raise doubts for customers about the stability of PeopleSoft as well.
To handle such conflict, the first thing independent directors needed to do was get an undistorted and complete report on PeopleSoft. Generally, giving management shares or stock options that would enable them to profit when shareholder values increase can create incentive for managers to act in the interest of shareholders. Directors may consider applying a Golden Parachute, an antitakeover strategy used to scare off bidder by giving a generous paycheck to the managers in case PeopleSoft is acquired by Oracle. However, in this case, PeopleSoft fired the CEO Craig Conway, stating that the board of directors had lost confidence in Conway's ability to run the company.
Ethical considerations
Many analysts raised questions about Oracle CEO Larry Ellison’s behavior, indicating his actions were aggressive and possibly even unethical. There were concerns expressed about the veracity of his statements regarding continued support for PeopleSoft products following an Oracle takeover. It was the opinion of our team’s “independent director” that this ethical “hand wringing” was a red herring. Insofar as the board is responsible for increasing shareholder wealth, a premium price paid by Oracle for PeopleSoft represents a sound business deal. In this case, what stood in the way were opinions of Ellison’s behavior, not actual legal problems he created. Shareholders who did not condone his alleged actions or who did not wish to affiliate with a company he was involved with were able to sell their shares and move to a more acceptable firm. One element of uncertainty in the decision process of PeopleSoft’ board was the possibility that Ellison might simply eliminate the employees of PeopleSoft who serviced the existing customer base, since he had indicated that future support for PeopleSoft products would be short lived. This was deemed unlikely since many analysts agreed that acquiring PeopleSoft’s large customer base and maintenance revenue stream was a primary objective for Oracle.
New wave of mergers
Exchanges are in the game of merger in today’s environment. The ongoing merger between NYSE and Deutsche Bourse has been a hot topic during the past few months. The bid offered by NASDAQ and ICE raised the ambiguous future of this merger. In addition, LSE announced an offer to buy TMX Group in February.
Another industry that is undergoing a consolidation wave is the telecom industry. On Mar 20, 2011, AT&T agreed to buy T Mobile for $39 billion. The telecom industry is maturing and the requirement for global access to new customers is making the consolidation of this industry fertile ground for M&A activity. It is easy to combine the infrastructure of two telecom companies and generate coverage synergies. The industry is all about coverage and market share, so the one that gets the lead in the market gets it all. Finally the gradual deregulation throughout the industry will significantly speeds up the consolidation process.
The airline industry also continues to experience consolidation. Cost savings will definitely be a priority for deals between airlines, especially as oil prices continue to rise. The recent global recession has hurt the airline industry and the remaining players are struggling for financial survival. Consolidation gives them a way to survive. The merger between UA and Continental will create the largest airline in the world. The new airline controls several major hubs and the market power enables it to raise airfare without worry about losing customers.
Conclusion
During the 18-month takeover battle, Oracle raised its offer several times and even lowered it once during the course of the hostile takeover effort. Oracle sued PeopleSoft in an attempt to have the poison pill removed; PeopleSoft and J.D. Edwards had sued Oracle several times. The litigation cost was definitely a burden for the three companies.
On December 13, 2004, the 18-month long drama ended as Oracle announced it was paying $10.3 billion in cash, or $26.50 per share for PeopleSoft, up 11 percent from PeopleSoft’s last close price at $23.95, and 65 percent higher than the initial offer. Shares of Oracle surged 9 percent while PeopleSoft stock shot up more than 10 percent on the same day.
Oracle has enlarged its share of the software market through organic growth and a number of high-profile acquisitions. By 2007, Oracle reported the third-largest revenue in the sector, after Microsoft and IBM. The successful acquisition of PeopleSoft came at a high cost to Oracle. Gubramanian’s analysis shows clearly that were it not for the “fog of war” Oracle’s bankers could have demonstrated how the defect in the pill, namely its ability to be revoked at the last minute rendered the PeopleSoft board vulnerable to Oracle’s pressure. Knowing they could not accept the consequences of actually triggering of the pill as written, and that Oracle could, would have forced a negotiated settlement much earlier and for less cost to the acquirer. In the end, PeopleSoft’s shareholders did realize good value on their investment.