Well, the trial debating the proposed acquisition of Peoplesoft by Oracle is officially over now. But, the acquisition itself, just like the Energizer bunny, just keeps going and going and going.
We’ll take a look at the highlights of that ongoing saga, as well as examining other news of the quarter from the database industry.
Oracle Versus the DOJ Re: Peoplesoft, 3Q2004
The trial pitting the US Department of Justice against Oracle Corporation continued merrily along this past quarter. And it ended, too; the final result being that Oracle won. But let’s not get
ahead of ourselves as we review the quarterly gyrations of this unending struggle.
One of the more interesting tidbits to be revealed during the trial was that Peoplesoft and Oracle had discussions about merging the two companies back in 2002. But evidently, a clash of egos
between Oracle CEO Larry Ellison and Peoplesoft CEO Craig Conway shot those discussions down in flames. First off, Ellison indicated that Peoplesoft originally contacted Oracle with the idea of a
merger. Ellison also claimed that Conway wanted to be the CEO of the merged business. Of course, Ellison felt that he, not Conway should run the newly combined business. During his testimony
Ellison stated “The only way he would merge the business is if he (Conway) and he alone ran the business. We had no choice but to bypass management and make the offer directly to shareholders.”
So, I see, it is a billionaire pissing contest, the winner of which will decide the fate of Peoplesoft. Hmmm… I guess if Peoplesoft actually ends up being acquired by Oracle we can sit back and
smugly say, “Hey, it was all their idea to begin with!”
In early July the final witnesses were called; late in July final arguments were held and the month-long trial ended. Well, the argument phase ended. U.S. District Court Judge Vaughn Walker then
took until the middle of September to review the matter and come up with his decision.
The basic argument of the U.S. Department of Justice (DOJ) was that an Oracle acquisition of Peoplesoft would throttle competition in the high-end applications market. The net result would be
higher prices and less spending on development by Oracle. On the other hand, Oracle argued that it needs Peoplesoft to compete with heavyweight competitors like SAP and Microsoft.
During the course of the trial it became apparent just how high the stakes were for Peoplesoft’s employees. Safra Catz, Oracle’s president (reporting to Larry Ellison) testified that Oracle plans
to slash 6,000 Peoplesoft workers upon completion of the takeover. Peoplesoft employees under the gun include all sales and marketing and in excess of half of its research and development staff.
That would save Oracle $1.17 billion in the first year alone. But it would seem to call into question how well Oracle would actually support the Peoplesoft applications after acquiring them – and
for how long.
One of the key turning points of the case was whether or not there even is a “high-end” of this market that limits the players to Oracle, Peoplesoft and SAP. Oracle says there isn’t; Peoplesoft
and the DOJ say there is. Evidently, the judge sided with Oracle. Personally, I would have sided with Peoplesoft – I mean, large organizations are not buying Microsoft’s Great Plain applications
instead of SAP R/3, are they? But that is neither here nor there at this point. And when news leaked that Microsoft and SAP had held preliminary talks about a merger, Oracle’s claims about
Microsoft’s plans for this market were bolstered. Oracle also successfully raised Lawson Software as another competitor in the space. But companies like Lawson Software are niche players,
regardless of the judge’s opinion.
Late in August, before the judge had decided the case, Oracle extended its deadline for Peoplesoft investors to tender their shares. The offer was set to expire on August 27, 2004, but the
extension kept things moving along at the current offer of $21 per share.
Then, in mid September the judge handed down his decision. Oracle had won and the DOJ had lost. The decision cleared Oracle to continue pursuing Peoplesoft shareholders to tender their shares. But
the court decision is not the end of this on-going battle. Peoplesoft’s share price shot up to just under the $21 bid price just after Oracle won in court. So Oracle has to convince Peoplesoft’s
shareholders to tender their shares, something that only a small number of them have done so far (as of mid September only 7.3 percent of the outstanding Peoplesoft shares had been tendered). And
with the price now nearly at the hostile bid amount, why not just sell the shares on the open market instead of tendering them to Oracle? Of course, Oracle can still increase its bid amount – and
that is something I think it will have to do if it is to ultimately succeed in its quest. Look for a bid more in line with the February 2004 offer of $26 a share to come back in play.
And there are other roadblocks in Oracle’s way. There is still the matter of the Peoplesoft “poison pill” customer rebate program. This program promises Peoplesoft customers a refund of two to
five times the cost of any Peoplesoft software they purchased, if the Peoplesoft is acquired. Oracle has sued Peoplesoft in a Delaware court to overturn the “poison pill,” but as long as it
remains in effect it can help to protect Peoplesoft against a hostile takeover. There is also the matter of the Oakland, CA jury trial that is asked to decide a Peoplesoft lawsuit contending that
Oracle is trying to damage its business with its takeover bid.
Furthermore, the US DOJ could decide to appeal the court ruling – and that could start up another round of court battles. Some antitrust lawyers think the DOJ has a chance of winning an appeal
because the judge’s decision seemed to discount the concerns of customers, whose opinions are usually given a lot of emphasis in antitrust law. The DOJ has 60 days to appeal the decision.
Finally, the European Commission is still investigating the merger. A hearing took place in March 2004 and the EC has asked for more information from Oracle. A negative ruling in Europe could still
derail this attempted acquisition. I think it is unlikely that the EC will rule differently than the US DOJ, though.
In the end, though, losing this trial hurts Peoplesoft’s bid to remain independent. Peoplesoft’s board of directors will have to negotiate with Oracle or perhaps face shareholder lawsuits that
contend it is not acting properly. Indeed, immediately after winning in court Oracle sent a letter to PeopleSoft’s board requesting a meeting. In my opinion, the board will likely meet with Oracle
and then announce that the $21 bid is not adequate compensation.
But the longer this drags on, the more it injures Peoplesoft’s business. Frankly, it would be difficult for a potential customer to come to the conclusion that buying Peoplesoft software would
make any sense at all until this matter is resolved. Indeed, Peoplesoft warned its investors in late July that its financial results for the year would miss expectations. And it placed the blame on
the Oracle takeover attempt.
Of course, the same can be said for Oracle’s applications. Why would a customer buy an Oracle application package when the future of Oracle applications may be Peoplesoft code? And if you look at
Oracle’s applications earnings (discussed later) this appears to be the case.
Peoplesoft did register a nice positive blip on the financial radar screen in early August. The company announced a deal with Mexico’s Tax Administration Service for $50 million. That deal is the
largest in Peoplesoft’s history.
In the wake of Oracle’s victory in court, the general consensus appears to be that more large mergers and acquisitions will occur in the technology industry – if Oracle actually succeeds in
snagging Peoplesoft, and that is still questionable. Indeed, companies such as BEA Systems, Lawson Software, and Siebel Systems appear to be on Oracle’s list of potential acquisition targets. It
makes you wonder what IBM, Microsoft, and others may by considering.
Oracle Gets a New CFO
Amidst all the hubbub of the Peoplesoft acquisition the news that Oracle finally found a replacement CFO for Jeff Henley was not widely reported. Oracle hired Harry You, a former top executive at
Accenture (the consulting giant previously known as Anderson Consulting) as their new CFO. This clears the way for Henley to step down as CFO and fully assume his new duties as the chairman of
Oracle’s board of directors. Henley held the position as Oracle’s CFO for thirteen years.
Monthly, Monthly, Now We Go, Oracle Comes a Patching
In mid-August Oracle made a big splash with its announcement that it would begin to issue patches for its DBMS on a monthly basis. The change in its software patch cycle was driven by news of
multiple security flaws found in Oracle’s flagship DBMS product.
David Litchfield, managing director of a security consulting firm in the UK, discovered the flaws earlier this year. According to Litchfield, there are more than 30 flaws in Oracle’s DBMS
including buffer overflow attacks and SQL injection techniques for gaining access to Oracle databases. Oracle spokespeople denied that there was actually that many flaws, but acknowledged some.
Some Oracle users have welcomed the monthly patch model because it delivers maintenance on a predictable schedule. Instead of receiving multiple fixes on an irregular basis, a single monthly fix
should be easier to plan, implement, and manage for Oracle DBAs. On the other hand, there are some potential problems with this methodology. If the monthly patch grows to be quite large, it could
become more difficult to administer. Furthermore, if severe security vulnerabilities are found it might not be advisable to wait until the next monthly patch is delivered. Of course, Oracle can
choose to deviate from its cycle if particularly onerous problems are uncovered.
The biggest problem Oracle has with this is timing. Litchfield announced the flaws in January, but Oracle had yet to release patches in early August. Oracle did state that it was aware of the
problems and had corrected them in the base code. And patches finally were made available by the end of the quarter.
Of course, none of this would have been such big news if Oracle had not decided to market its DBMS as unbreakable. The truth of the matter is that the bugs, though problematic, are not likely to
cause any major problems for Oracle users. Most Oracle databases sit behind firewalls and are relatively secure. So exploiting those flaws in non-patched Oracle instances is not quite as easy as
the dire warnings from the pundits would make it sound.
Another Court Case for Oracle
Even with the DOJ case regarding its acquisition of Peoplesoft over, it looks like Oracle will be spending a large amount of time in court. In September 2004, a federal appeals court reinstated a
$1 billion securities fraud case against Oracle. The case had been dismissed three different times before because of lack of evidence. But this ruling cited that the evidence of accounting
irregularities, falsification of software sales and “suspicious” stock trading is strong enough to warrant proceeding.
Particular attention will likely be paid to Larry Ellison’s past stock trading activities. Approximately a month before Oracle announced poor results (several years ago now), Ellison sold more
than 29 million shares of Oracle stock for almost $900 million. The court noted that the majority of those shares were options that Ellison acquired for 23 cents a share – and sold for $30 to $32
The suit alleges that while Oracle was assuring the public in early 2001 that it was thriving despite a sagging economy, top executives knew their internal projections were not so rosy. In March
2001, Oracle announced that its revenues were below expectations and the stock immediately dropped from $19.50 to $16.88 in a single day.
The renewal of this case could take some of Oracle’s focus off of Peoplesoft as it defends its financial practices during 2000 and 2001.
Anyway, Larry is Earning Again
Larry Ellison is collecting a paycheck again. According to documents filed by Oracle this past quarter Ellison (the CEO of Oracle) earned $3.85 million in salary and bonuses for the fiscal year
that ended May 31, 2004.
Why, you may be asking yourself, is this newsworthy information? Well, way back in June of 1999 Ellison agreed to surrender his annual salary ($1 million) in return for 40 million Oracle stock
options. In September 2003 Ellison started to receive his salary again (along with 900,000 more options). And next fiscal year Ellison could earn up to $5 million in salary and bonus.
Oh, yes, in case you were wondering if Ellison would be able to survive on that, he also exercised 4 million stock options resulting in a $42 million gain during last fiscal year (according to the
SEC documents filed by Oracle). So, don’t start up a collection for him just yet.
DBMS Vendor Financials
Now let’s take a look at the financial performance this past quarter of the two biggest DBMS vendors: IBM and Oracle.
IBM’s overall results this past quarter (for their fiscal second quarter) were just shy of consensus estimates. Q2 total revenues were $23.2 billion and the consensus estimate was $23.3 billion.
However, the results showed a year over year increase from Q2 of last year, which returned $21.6 billion in revenues. Earnings per share (EPS) was $1.16 and that was better than the consensus
analyst’s estimate of $1.12; it also reflected a year over year increase of 14 cents over last year’s EPS of 98 cents.
IBM’s software numbers were flat though with DB2 up 5%, but both Rational and Tivoli each down 5%. So the DBMS business continues along as IBM’s best software performer.
Late in the third quarter Oracle released its fiscal first quarter results and they were just a bit better than expected. The company earned $509 million, or 10 cents per share, during the three
months ended in August, 2004. That translates to a 16 percent improvement from $440 million, or 8 cents per share, during the same period last year. Overall revenue for the quarter was $2.22
billion, and that represents a 7 percent gain over the $2.07 billion of revenue Oracle earned during the same period last year.
Consensus estimates for Oracle’s earnings were 9 cents per share. So, Oracle’s results were a slight surprise on the upside. Sales of database software totaled $494 million – a gain of 18 percent
over last year. However, sales of its applications software were down 36 percent from last year with just $69 million sold. I guess this helps to explain why Oracle is so driven to acquire
Open Source DBMS News
This quarter offered up a veritable cornucopia of goodies to open source database proponents. First to pony up some help to the cause was Computer Associates (CA). Not typically noted for their
sharing, CA funded a $1 million challenge to encourage open source developers to use Ingres – one of CA’s many DBMS products, but the only one that was recently converted to open source (May
The plan is to get programmers within the open source community to develop tools that help companies to switch from other DBMS products to Ingres. Under the terms of the offer, open source
developers can qualify for cash awards of up to $400,00 a piece (with an overall grant total amount of $1 million available), when they create solutions that enable users of IBM DB2, Informix,
Oracle, Microsoft SQL Server, MySQL, and/or Sybase Adaptive Server Enterprise to migrate to Ingres. This novel plan may actually help to build some momentum for Ingres that frankly did not seem to
be building since CA’s announcement in May 2004 that released Ingres into the open source community.
But Computer Associates was not alone in trying to bolster the open source database market. During the same week, IBM announced that it was contributing about a half million lines of the latest
version of Cloudscape, called “Derby,” to the Apache Software Foundation (ASF). The ASF will oversee efforts to establish the technology as an open-source DBMS. IBM still plans to release a
commercial version of Cloudscape later in 2004.
Cloudscape, which IBM acquired when it bought Informix a few years ago, is Java-based and is primarily an embedded DBMS. Having only a 2 MB footprint it is ideal for embedding into other
applications. IBM indicated that Cloudscape is already embedded into more than 70 IBM software products.
By introducing Cloudscape as open source software IBM may be able to increase its presence in the SMB market – a market that is not traditionally within IBM’s target.
Finally, in early September Sybase announced plans that were “open source”-like, but not really open source. In what appears to be a bold attempt to expand its customer base, Sybase offered a
free, limited version of its Sybase ASE Express Edition DBMS software for deployment on Linux systems only. Though ASE Express Edition is free for both development and production purposes, its
usage is limited to a single CPU, 2GB of RAM, and 5GB of total data storage.
Although this is not open source, it has one of the elements of open source that has so charmed the masses; that is, it is “free.” This program may help to spark interest in customers who might
not otherwise consider Sybase. However, for most medium to large customers, the 5GB limitation will be troublesome.
General Availability for Stinger
IBM’s Stinger, now known by its more pedestrian name DB2 UDB Version 8.2, was released for general availability at the end of the third quarter. This new version of DB2 has received quite a bit of
publicity for a point release. IBM has been touting it as the industry’s first automatically self-managing and tuning DBMS. How bold! I remain quite skeptical. While IBM has added a lot of new and
great functionality to Stinger, it is doubtful that it will produce only databases that need no human intervention to manage.
Among the new autonomic features are the IBM Learning Optimizer (LEO), the DB2 Design Advisor, and more than 200 additional new management features. So don’t get me wrong, I’m a big fan of these
new features, but Stinger won’t deliver a lights-out, 100% no-DBA environment.
For additional details on DB2 UDB V8.2 (Stinger), consult the “What’s New” manual on the web at ftp://ftp.software.ibm.com/software/data/db2/stinger/stingerwhatsnew.pdf.
In other DB2 news, early in July IBM released new benchmarks showing stellar online transaction processing performance for DB2 UDB. The benchmark ran on a 16-way IBM eServer p5-570 machine and
results surpassed competitor’s results on systems with up to 4 times more CPUs. IBM also released some fantastic benchmark results running SAP packaged applications.
Which brings us to the end of the third quarter of 2004. We’ve got one more to go and it should be quite interesting. Even though the Oracle / Peoplesoft trial is over in the US, there should be
more news on the acquisition, as well as possible news from Europe. And the other DBMS vendors are sure to be active, too. So check in again with us next quarter at TDAN.com to hear all the latest
news about the DBMS market place.