Oracle’s Larry Ellison, a chief executive not known for being timid, has thrown a big boulder into a small pond with his company’s hostile takeover bid for PeopleSoft. The ripples will be rocking companies in the business software industry for some time to come.

Wharton faculty members say Oracle’s bid to acquire PeopleSoft reflects several realities: Ellison’s penchant for the dramatic and the inevitable forces of consolidation that arise when industries begin to mature, as is happening with companies that sell business software. What is unclear, the faculty members say, is exactly why the proposed deal was initiated and whether there is a reasonable chance the two firms can be consolidated successfully. They also say it is unusual that Oracle did not offer more money for PeopleSoft – which historically has been the case in most attempted hostile takeovers – and that Oracle’s less-than-stellar offer may leave PeopleSoft shareholders looking for a white knight to come to the rescue with a better deal.

In the end, securities analysts, software customers and other observers may need an oracle of their own to figure out how this hardball move by Ellison will reconfigure a $36 billion industry that is somewhat obscure and does not quite capture the imagination of the public, yet is nonetheless important, lucrative and growing. Raw emotions could play a big role in the days to come, given that the enterprise software companies comprise a tightly knit group where everyone seems to know everyone else and personalities and friction are often not far from the surface, according to the Wharton experts.

“There’s some debate as to whether Oracle is truly serious about acquiring PeopleSoft or if it made its bid just to be a spoiler to fend off [a previously announced merger of PeopleSoft with J.D. Edwards, a Denver company],” says Morris Cohen, professor of operations and information management. Cohen says a successful bid “would reduce competition and give Oracle access to a big piece of the market they don’t have.” If it turns out that the bid falls through, he adds, “What do they have to lose?”

“The key question is whether Oracle will be able to successfully integrate PeopleSoft, given the bad blood that is already there between the CEOs of the two companies,” says management professor Harbir Singh, who has done extensive studies of mergers and acquisitions. “Both companies have distinct cultures, so it wouldn’t be straightforward. Oracle is a good company with a strong tradition and PeopleSoft has its own independent tradition.”

Singh adds that earlier – friendlier – merger talks between PeopleSoft and Oracle collapsed, reportedly because PeopleSoft wished to retain its independence after a combination. “With that kind of history, the difficulty of integration becomes a real issue.”

Oracle’s unsolicited offer – launched on June 9 as a $16-per-share, $5.1 billion cash bid and sweetened on June 18 to $19.50 per share, or $6.3 billion – has already had wide-ranging effects and created a somewhat nasty atmosphere. PeopleSoft, of Pleasanton, Calif., announced on June 12 that its board voted unanimously to urge that shareholders reject the original $16-per-share offer. In a news release, PeopleSoft said the offer “dramatically undervalues” the company and that an acquisition “would undoubtedly face lengthy antitrust scrutiny, with a significant likelihood that approval would not be granted.” PeopleSoft also said that “a prolonged regulatory approval process, combined with Oracle’s public statements that it would discontinue PeopleSoft’s products, creates uncertainty for PeopleSoft’s customers, hindering the company’s momentum and negatively impacting the company’s financial performance.”

On June 14, PeopleSoft fired a legal salvo against Oracle by filing a lawsuit in Alameda (Calif.) County Superior Court seeking an injunction to block Oracle’s offer. The suit accused Oracle, of Redwood City, Calif., of a “sham tender offer aimed at destroying PeopleSoft’s business.” The suit alleged that Oracle’s bid has interfered with PeopleSoft’s agreement, announced June 2, to acquire J.D. Edwards to create the world’s second largest enterprise applications software company. PeopleSoft valued its proposed acquisition of Edwards at $1.7 billion.

Craig Conway, PeopleSoft’s president and chief executive, said in a news release: “By making an offer with the acknowledged intent of eliminating PeopleSoft’s business, Oracle seeks to disrupt PeopleSoft’s efforts to complete new sales, thus effectively damaging PeopleSoft’s business even if Oracle never buys a single share of PeopleSoft stock.” Conway, a former Oracle executive, said PeopleSoft would move forward with its acquisition of J.D. Edwards “despite Oracle’s unlawful efforts to destroy competition.” For its part, J.D. Edwards has endorsed PeopleSoft’s rejection of Oracle’s bid.

An Oracle spokesman has called PeopleSoft’s suit “frivolous,” saying PeopleSoft’s shareholders should be given the chance to consider the tender offer.

Oracle’s bid has had additional ramifications. For one thing, another maker of business software, Siebel Systems, of San Mateo. Calif., emerged in press reports as a possible takeover target. What’s more, J.D. Edwards on June 12 filed its own lawsuits, in California and Colorado, accusing Oracle of interfering with its merger with PeopleSoft. J.D. Edwards was seeking $1.7 billion in damages. Oracle said the suits had no merit.

Then, on June 16, PeopleSoft and J.D. Edwards announced that they have revised the terms of their agreement in an attempt to accelerate their merger and fight off Oracle’s bid for PeopleSoft. PeopleSoft said that the revamped offer would include $863 million in cash and increase the value of the deal to J.D. Edwards’ shareholders to about $1.75 billion. The original offer had been an all-stock deal.

While Oracle and PeopleSoft were exchanging barbs, SAP, the world’s leading business software company, launched an advertising campaign on June 12 to try to drum up business from customers of PeopleSoft and J.D. Edwards. Leo Apotheker, head of global field operations for SAP, based in Walldorf, Germany, told the Financial Times that his company was offering “an alternative” to customers of PeopleSoft and J.D. Edwards who may be feeling “massive uncertainty” about the futures of their software suppliers.

Oracle’s Motives

Ostensibly, Oracle wants to acquire PeopleSoft to become stronger in products where the company is now weak. Ellison has said that Silicon Valley is past its prime and that high-tech companies will have to consolidate to survive the coming shakeout. According to the Wall Street Journal, Ellison has been “quietly planning” to lead the consolidation. His focus is on business-applications software – programs that handle functions like finance, accounting and customer relationship management (CRM) – which is the kind of software PeopleSoft specializes in. But this kind of software is a weakness for Oracle. As the Journal puts it: “While [Oracle] is the largest maker of database software, which can store information on everything from airlines reservations to car parts, it has a mixed record” in competing with PeopleSoft, SAP and Siebel Systems in selling software programs that are more specialized.

But there may be more to Ellison’s maneuvering than acquiring some products that Oracle does not offer, according to the Wharton faculty members.

Echoing Cohen’s remarks, Singh says: “There are two different possible motives for Oracle. One is a positive story in which Oracle buys PeopleSoft to enhance its competitive position, because if PeopleSoft were to buy J.D. Edwards it would be ahead of Oracle and pose a threat to Oracle. In this scenario, Oracle gets new products, new customers and new employees, and keeps its number two position [behind SAP] in enterprise software. The possible negative motive is that Larry Ellison, who has a bit of a reputation for not being easy to get along with, is only doing this to grab the limelight and disrupt both J.D. Edwards and PeopleSoft. Customers don’t know whether they should continue to work with PeopleSoft and J.D. Edwards, so the two companies get frozen in position. Only time will tell which story is true.”

Thomas Lee, professor of operations and information management, says Ellison has a vision of ensuring that Oracle is, to a large extent, a vertically integrated company that is equipped to offer virtually any business software product or service to customers. What kind of customers? Not large, multinational corporations, which already have invested billions in enterprise software, according to Lee, but mid-size companies where the potential for growth is greatest.

“The thinking is, ‘We have to get it all in one house,’ and Ellison is trying to do that,” Lee says. He adds that Ellison could try to achieve vertical integration through “a combination of acquisitions, either of companies or people.” So far, he notes, Oracle “has not had a great track record with many of these middle-tier companies.”

Cohen agrees that Oracle wants to be all things to its customers. Cohen says he himself is involved in a company that uses business software and has had a chance to see first-hand how software vendors operate. “Vendors are trying to develop a full suite of enterprise applications and crowd out the best-of-breed. Oracle and SAP would like to dominate the market and be the only place you can buy software. Oracle wants to be the sole source of software for its customers. The [bid for PeopleSoft] is consistent with that [strategy]. Oracle already has a lot of power. Every time a new application is developed, you can freeze the market. This is an attempt to control all aspects of the market.”

A Lack of Synergies

Marketing professor Peter Fader says he sees a “lack of bona fide synergies” between Oracle and PeopleSoft. “My concern is: Will the Oracle/PeopleSoft combination make the entity stronger than their separate parts? I don’t see how. It’s one thing if Oracle said there were certain assets in PeopleSoft that will help the weak parts of Oracle, but nowhere in anything I’ve read has there been talk about how these are good puzzle pieces to put together.”

More broadly, Fader sees a lack of differentiation among the products and services offered by all makers of enterprise software. “Nowhere in the coverage of the Oracle story, or in people’s reaction to it, has anyone talked about the positioning or the unique angle that each of these companies has in the marketplace. I think that says an awful lot about this market. If you ask someone how Oracle is different from PeopleSoft, and how Oracle compares to SAP and Siebel, most people would say, ‘I don’t know.’ It’s almost as if these companies are selling a commodity product or service.”

In general, according to Fader, enterprise software has yet to see its promise fulfilled. Such software has become increasingly important as organizations seek to use the latest technologies to improve their performance and competitive position. Functional areas of companies – everything from supply chain management to sales force management, and financial systems to customer relationships – had their own software in the past and all were important to corporate operations.

But, more recently, the idea has been to put together a central platform to provide a view of how the parts work together across the whole enterprise, Fader explains. Some software has worked well and some companies have been able to carve out distinct positions in the kinds of products they offer. “SAP was highly regarded for supply chain management. Siebel was highly regarded for sales force management. But they’ve become blurred as these companies have attempted to be all things to all people. You don’t really see those strong positionings anymore and things end up being more of a commodity.”

Fader adds: “There were excessive expectations about how these different enterprise software programs would revolutionize business. Everyone thought this would fundamentally change the ways companies operate. CRM was supposed to be the next big thing and it hasn’t in any way met expectations. There is a bit of bloat on the part of these companies on the supply side and underperformance on the demand side.”

Consolidation is Coming

According to Fader, the enterprise-software industry will undergo consolidation. Moves like PeopleSoft’s planned merger with J.D. Edwards and Oracle’s bid for PeopleSoft are “inevitable in an industry that’s rapidly moving from a growth phase to a mature phase. That happens in all industries. As the party ends, and the market becomes a fixed pie, you start to see consolidation and fewer new entrants. But the interesting thing about this industry is how rapidly it happened. Two years ago this industry was where all the action was and it was thought no one could possibly fail because this kind of software was supposed to be the magic elixir. But it hasn’t turned out that way.”

As for whether the proposed takeover raises antitrust flags, Fader calls any such concern “a total non-issue. There are enough big players now and there still will be enough big players. Also, there’s no chance of any monopoly potential here. There are so many companies out there that don’t use any of these software providers … and so much upside potential for these providers to grow.”

Singh sees the issue of consolidation differently from Fader. “Ellison has said the industry is ripe for consolidation. It’s true that consolidation comes about in most industries that have gone from growth to maturation. But I don’t know if this is one of those moments. The reason I say that is the nature of the technologies underlying these enterprise solutions. Some of them could be disruptive, so you could conceivably always have new entries into the market and a shifting of market share as a result of changing technologies.”

Singh says enterprise software is “a fast-growing market and I think it will continue to grow. Electronic means of communication and decision support are still in the rollout process in organizations.”

As for Lee’s assertion that most of the growth going forward will be in the middle-tier market, Singh says that is only partly true. Noting that he is involved in a Wharton program that gives awards to companies engaged in transforming themselves, Singh says he has reviewed applications from many companies that creatively use information technologies.

“All kinds of corporations are trying to integrate information technologies and use enterprise solutions to capitalize on them. There will be more penetration in the middle-tier market but large companies are still [looking] for new and improved software.” Singh adds that Oracle itself supports the Linux operating system, a free system that is seen as a threat to Microsoft Windows. “This means there are new ways of configuring operating systems in companies, and solutions will continue to change and grow.”

Looking Ahead

Meanwhile, it’s too soon to say what will happen to Oracle’s bid, suggest the Wharton faculty. For one thing, Fader notes, it would be wrong to underestimate the unpredictable roles that egos and personal relationships will play in such a closely knit industry. PeopleSoft and Siebel Systems, for example, were started by former Oracle employees. Conway, the CEO of PeopleSoft, once worked for Ellison. SAP was launched by former IBM executives.

“If [Oracle’s bid] was ego-driven at the beginning, now it’s even worse, especially if people throw stones at each other,” adds Fader. “I think [Oracle’s bid] is a sign that this industry is in distress and is about to go through cataclysmic changes. A great deal of consolidation will occur.”

Before Oracle sweetened its bid on June 18, Singh said that the original offer was so low that it threatened to doom the acquisition attempt.

Cohen predicts that “Oracle will not get this deal and the original merger [of PeopleSoft and J.D. Edwards] will go through.”

If PeopleSoft and J.D. Edwards do merge, Lee says, it would be a good fit. “They’re both considered ERP [enterprise resource planning] players. PeopleSoft primarily focuses on human resources and management software and J.D. Edwards has a focus on financial and back-office software. A merger would reap benefits by making their combined customer base stronger.”