Oracle's take-over of PeopleSoft has altered the enterprise applications market forever. SAP is still king of the enterprise resource planning (ERP) market by a good margin, but with Oracle's new acquisitions, it may actually have to put up a fight to stay out in front.
In the short-term, though, SAP can rest easy, because the task facing Oracle in terms of integration and application development and support dwarfs the take-over itself. It will also mean changes to its channel structure, most notably to Peoplesoft resellers, but also to some of Oracle's larger partners as reseller programmes will inevitably be tweaked, expanded or completely redrawn.
At the moment, details of Oracle's channel plans are thin on the ground. Damage limitation is the name of the game right now, as the company continues to reassure PeopleSoft customers and partners that it will not destroy what it has fought so hard to get hold of.
It all started in June 2003, when PeopleSoft launched a bid to take over JD Edwards. Just days later, Oracle launched a hostile bid worth $5.1bn for PeopleSoft which was condemned by both PeopleSoft and JD Edwards as a blatant attempt to disrupt their merger. At the time, many in the industry thought so, too.
It did not help that PeopleSoft chief executive Craig Conway - a former protégé of Larry Ellison's - disliked Oracle as a company and seemed to reserve similar reservoirs of bile for its incarnation in human form: Ellison himself.
Ellison's typically outspoken comments just added fuel to the flames, especially his claim that Oracle planned to axe all of PeopleSoft's staff and cease development of PeopleSoft products. In a tit-for-tat scenario, PeopleSoft rejected Oracle's bid and Oracle proceeded to up its offers, only to have them rejected as well.
By late 2004, after court battles and courtship rituals, Oracle had won shareholder support, Conway got the boot and PeopleSoft's board spoke to Oracle for the first time. On 13 December 2004, Oracle closed the deal for $10.3bn; over double its original and somewhat cheeky offer of $5.1bn. Did it do the right thing?
"I was surprised that Oracle went for PeopleSoft at the time," recalls Greg Carlow, managing director of Repton.
"I thought it would have gone for JD Edwards, but PeopleSoft got there first. In the end, Oracle got both. Oracle needed to do something like that, though, because its own applications were running out of momentum.
"It had won the database battle in the medium-to-enterprise market space, while Microsoft was in control from medium to small companies with SQL Server. It could see its potential market was maxing out, and it had a pile of money in the bank. The PeopleSoft acquisition is a complementary one and it was a smart buy, because PeopleSoft has a great reputation."
Bo Lykkergaard, research analyst at IDC, agrees. "Oracle had to do something," he says. "It was number two and losing ground to market leader SAP. There was leap-frogging happening below it, and a merged PeopleSoft/JD Edwards would have surpassed it, or been at least the same size in the applications space."
Consolidation is the name of the game in this sector, with many smaller companies being bought up for the technologies. Larger players, of course, are bought as much for their customer base as their technology. In the ERP market, maintenance revenues are where the real cash is to made.
The software might cost millions in terms of licence revenue at the start, but roughly 20 per cent of that value is forked over every year by customers for maintenance and upgrades.
"The fee customers pay for maintenance and upgrades has been steadily increasing," Lykkergaard points out. "Software maintenance revenues have been slowly becoming more important than licence fees. It must be remembered that in the enterprise arena, size is very important. The amount of maintenance revenue you generate decides how much R&D you can do."
SAP is the ERP market leader, especially in Europe, where its 39 per cent market share compares very favourably with the 11 per cent held by the merged Oracle/Peoplesoft, according to IDC.
Throughout the 18-month wrangle, SAP has stolen share from the others and sees no reason why that should stop considering the integration task facing both companies. It also discounts that a bigger Oracle equates to a bigger threat.
Markus Berner, a representative for SAP, says: "The transaction is complete from a financial and legal standpoint, but the customer needs have not been addressed. There is still a lot of uncertainty for PeopleSoft and JD Edwards customers, and we are in a unique position to offer them a safe passage to get there.
"Also, while we take all competition seriously, we can now focus on one competitor instead of two. In business, it's always better when you have less to focus on."
So was the initial hostile bid fuelled by a desire to protect to its position in the market, or part of a long-term strategy? At the start, it was all about taking out the competition.
Initially, Oracle had no intention of producing any new PeopleSoft products. In its initial offer Oracle said, if successful, it would support existing customers but discontinue development of all PeopleSoft products.
The upshot of that would have seen Oracle kill off two rivals and then sit back to harvest a few hundred million dollars every year in maintenance revenues - at least until it could migrate those customers over to Oracle products.
That position changed within a few months, thanks primarily to a massive backlash from PeopleSoft customers, employees and shareholders. In addition, the blatant quashing of two rivals would have made the take-over virtually impossible in the eyes of competition regulators.
Nineteen months on, Oracle's stance has completely changed on the future of both companies. Despite its conciliatory approach, klaxons were sounding one month after the deal was struck when Oracle announced 5,000 lay-offs at PeopleSoft.
However, just when everyone was sure things were going to get worse Oracle announced a very ambitious software strategy.
Oracle intends to simultaneously develop its own, PeopleSoft's and JD Edwards's product lines, while also working on an integrated product set, Project Fusion, that will incorporate the best of all three. This amounts to four parallel efforts spanning the best part of the next decade.
On top of that, Oracle is also planning to run separate support operations for each product line in the hope that being able to deal with the same support staff will allay the fears of many PeopleSoft and JD Edwards's customers, most of whom condemned Oracle's hostile bid.
SAP and Microsoft have already made overtures to them, hoping to lure away those that do not believe Oracle's promises. SAP has been the most aggressive, taking over a key PeopleSoft support company in Texas and offering its 'Safe Passage' scheme to 2,000 customers that use both SAP and PeopleSoft/JD Edwards software.
Lykkergaard says: "I believe that Oracle has its hands full with the integration. Some of the moves it has taken in replacing some of the Oracle directors with PeopleSoft directors is showing that it is combining two companies, not just acting like the big company in the merger.
"It is also putting key PeopleSoft technical staff in key positions. This has to be as much a psychological as a physical merger."
He adds: "As for losing customers, you have to remember that replacing an ERP system is a very expensive operation. The question is, can Oracle help make a new platform that is not inferior to the current Peoplesoft platform? If it can there is no real reason for a Peoplesoft customer not to eventually become an Oracle customer."
Carlow agrees. "Moving away from a big ERP system is a massive job that requires a lot of pain. Oracle won't have trouble hanging on to them since most of those customers will work off the logic that it's the people in the company that provide the support and continuity.
"Those same PeopleSoft people are now just Oracle people. PeopleSoft customers will wait to see how things pan out. There will be a few hysterical people hopping up and down, but 99 per cent will stay," he says.
So what will it all mean for the channel? Oracle has indicated that it is in the process of merging PeopleSoft's Partner Connection channel programme with its own PartnerNetwork set-up. The end result will be known as PartnerNetwork.
Licence fees for PeopleSoft resellers will continue as normal until the new programme is in place, which is expected in March. Oracle partners that currently resell its E-Business Suite will not, however, be offered the chance to resell PeopleSoft's offerings at the moment.
No indications of who will be allowed to sell what have been released. Oracle is adamant that the new deal means new opportunities.
"The combined companies will offer our UK partner community innovative new ways to better service their customers," claims Trudy Norris-Grey, vice- president of alliances and channels at Oracle UK. Since CRN spoke to Norris Grey for this article, she has left the firm to become managing director of Sun UK.
"It's about giving them more choice and greater flexibility. By combining Oracle and PeopleSoft, we will enable PeopleSoft's channel partners to offer their customers even greater choice.
"Many of PeopleSoft's partners are already Oracle partners, so they will have greater access to customers and products at a more competitive membership rate. PeopleSoft's application partners will now have access to Oracle's technology stack, so they will be able to offer their customer base a broader and integrated product portfolio."
Andy Griffiths, business development manager at Oracle reseller Q Associates, says: "There might be an opportunity to expand what we offer. We just have to be sure we have the skill sets in place if such an opportunity arose.
"You can't have just Oracle resellers - even ones as new as us - starting to sell Peoplesoft solutions because a whole new skill set is required. There will have to be a lot of education to do new opportunities justice."
Harris is quick to assure Oracle resellers that new opportunities will become available: "Oracle resellers will benefit from broader reach and a greater product portfolio, while still enjoying the benefits of the Oracle PartnerNetwork. This means they will have opportunities to expand their customer base."
Carlow says: "I would have thought that the bigger system integrators ? will see some opportunities from the merger. As to the merging of channel programmes, there's always a new initiative so it's nothing new. The paper might change colour, but the deal is often the same."
Oracle may have thought the battle to acquire PeopleSoft was tough, but according to rivals, market analysts and channel partners, the real battle - making it work - is only just beginning.
One man and his dog
The only thing more hostile than the actual take-over was the relationship between both chief executives. A former protégé of Larry Ellison at Oracle, Peoplesoft chief Craig Conway was not a fan of his previous employer. When Oracle announced its hostile bid in June 2003, Conway described it as "atrociously bad behaviour from a company with a history of atrociously bad behaviour". The war of words had begun.
A month later Conway compared Oracle's bid to someone asking to buy your dog and then taking it out back and shooting it. Ellison, no stranger to outrageous quotes, fired back his retort at an analyst meeting: "I think at one point, 'Craigey' thought I was going to shoot his dog. I love animals. If 'Craigey' and his dog were standing next to each other and I had one bullet, trust me, it wouldn't be for the dog."
Later, in September, at Peoplesoft's annual user conference, Conway and his dog, Abbey, both appeared on stage in matching bullet-proof vests. Conway stated: "Have you noticed how often Larry Ellison changes his mind? First, they're going to cancel all our products, then they're not. Then they're going to fire all our employees, then they're not. He's going to shoot the dog, then he's going to shoot me. So, Abbey and I have decided not to take any chances."
Things settled down in 2004, at least on the public front, but behind closed doors the bile was boiling. Conway compared Ellison to Genghis Khan. These remarks and others had to be explained by Conway in court. He admitted to labelling Oracle a 'sociopathic' company but denied calling Ellison a sociopath.
The Peoplesoft board used Conway's demonising of Oracle, and his false claims to analysts that Oracle's bid was not damaging PeopleSoft's business, to sack him in October 2004. Conway's parachute cost $3.2m. With Conway gone, the board signalled that it was finally open for talks and just two months later the deal was inked.
IDC (020) 8987 7100
Oracle (0118) 924 0000
Repton (020) 8894 9000
SAP (0870) 608 4000
Q Associates (01635) 248 181
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