PeopleSoft hits merger target
Published: 18 Jul 2003 13:38 BST
PeopleSoft on Friday announced that investors have tendered 88 percent of J.D. Edwards shares, delaying the closure of the $1.8bn (£1.13bn) merger as J.D. Edwards shareholders must now vote on the deal.
As PeopleSoft marks this milestone in its effort to expand its reach in midmarket business applications and the manufacturing sector, the maker of high-end business software will find that its work has just begun.
The soon-to-be combined company -- which would be the second-largest enterprise applications company in the world -- will need to execute on several fronts, from integrating business operations and melding corporate cultures to retaining and growing its customer base. And in the meantime, it must prove to shareholders that its merger is a better investment than Oracle's hostile $6.3bn takeover bid for PeopleSoft. For Oracle, the challenge in acquiring PeopleSoft is likely to become tougher.
PeopleSoft may want to avoid a repeat of its last large acquisition, in which it took several years from the time of the 1999 purchase to efficiently integrate customer relationship management specialist Vantive.
The integration with J.D. Edwards is already moving forward, according to PeopleSoft's president and chief executive, Craig Conway. Under the merger, J.D. Edwards will operate as a wholly owned subsidiary of PeopleSoft.
"We will have product lines that will continue in the marketplace (after the merger)," Conway said during a conference call with analysts on Thursday. One will be the AS/400 business, another will cater to the midmarket and a third will handle large enterprise customers.
Conway added that PeopleSoft plans to meet with analysts again next month, in which time it will go into greater detail on the integration plans.
Sizing up the cultural fit between the two companies, Bob Dutkowsky, J.D. Edwards' chief executive, said in an interview with CNET News.com earlier this month: "Our cultures complement each other and our architectures complement each other."
Dutkowsky added that there is little overlap between the two companies, creating a nice fit between the operations. PeopleSoft serves the services industries and large enterprise customers, while J.D. Edwards caters to the manufacturing, distribution and asset-intensive industries.
But at least one analyst sees a greater challenge in bringing the two companies together.
"There's a lot of duplication in functionality, so it will be interesting to see how all the integration issues work out," Ted Kempf, a Gartner analyst, said in an earlier interview.
PeopleSoft on Friday reiterated that it expects the J.D. Edwards merger will add significantly to its 2004 earnings, excluding amortisation and other items. Also, the company anticipates cutting operating expenses by $80m annually for the combined company within its first full year of operation.
The tender offer for J.D. Edwards shares closed at midnight Thursday. J.D. Edwards investors received an exchange rate of $14.74 for every share they turned into PeopleSoft shares. Those who did not tender their shares will receive $7.05 in cash plus 0.43 of a PeopleSoft common share for each J.D. Edwards share. PeopleSoft ended the trading day Thursday at $17.90.
The company expects to acquire the remaining shares of J.D. Edwards before the end of August.
The Oracle factor
But Oracle's hostile bid may serve as a distraction from those plans.
"PeopleSoft has a very difficult challenge. They have to run their business, they have to think about the integration plan, and they have to fend off Oracle's hostile bid. They have an even more difficult challenge than we do," Dutkowsky said. He noted, however, that he remains optimistic Conway will succeed in integrating the companies.
Not only will PeopleSoft need to keep the customers of the combined company happy, but also the investors. Unhappy investors will likely be particularly sensitive to Oracle's buyout offer of $19.50 a share.
"PeopleSoft and J.D. Edwards were able to get their transaction completed. But at the end of the day, if the stock isn't near $19.50 a share in six months, there will be some stockholders who aren't going to be happy about things," said Cameron Steele, an analyst with RBC Capital Markets.
J.D. Edwards investors stand to make a quick gain on their investment, should Oracle succeed in its hostile takeover attempt of PeopleSoft and they tender their shares to the database company. If they tender their shares to Oracle by its 15 August deadline, they would receive $19.50 a share if the hostile merger goes through.
"We're in the process of evaluating that at this time. It all comes down to how strongly we feel PeopleSoft can successfully execute on integrating the companies and whether the synergies they hope to accomplish are realistic," said one large institutional investor for J.D. Edwards.
PeopleSoft's merger with J.D. Edwards also creates several new issues for Oracle's hostile bid. But Oracle still plans to move forward with its efforts.
"We believe time is on our side. Oracle remains committed to acquiring PeopleSoft -- even with the addition of J.D. Edwards," said Jim Finn, an Oracle spokesman.
Based on its current offer of $19.50 a share, Oracle would have to pay an additional $1bn to acquire PeopleSoft after its J.D. Edwards merger, according to Tad Piper, a senior analyst for Piper Jaffray. That figure is based on the additional 52.6 million shares that would result from the PeopleSoft and J.D. Edwards merger.
But Piper noted Oracle has access to a combined $11.5bn in cash and credit, enough to easily pay for a newly merged PeopleSoft.
"They are staying at $19.50. I don't see that changing until the antitrust debate (for Oracle's bid) is resolved," Piper said.
The US Department of Justice and attorneys general from approximately 30 states are reviewing Oracle's buyout offer of PeopleSoft.
Meanwhile, Oracle has remained quiet on any plans it may have for J.D. Edwards, if it acquires the combined company. But some analysts and sources familiar with the companies said a spinoff of all or part of J.D. Edwards' business may be on the list.
"It's a lot less attractive to Oracle to buy J.D. Edwards, because a large percentage of the J.D. Edwards customer base is on IBM technology. The ability to up-sell in the J.D. Edwards customer base is less so than in the PeopleSoft customer base," Piper said.
If its bid succeeds, Oracle may cut loose J.D. Edwards' AS/400 business from the rest of its operations and sell it to SSA Global Technologies and Baan, which are merging, said a source familiar with J.D. Edwards.
"It would be a clean cut to spin off that business and sell it to SSA and Baan, which are in that business," the source said. "Do I think Oracle would sell it to their competitor? No. But I do think they will use it as a carrot to say they could if they have antitrust issues with the DOJ and attorneys general."
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