Oracle's Bid For PeopleSoft Is Latest Evidence Of Sea Change In Enterprise Apps Space 2Oracle's Bid For PeopleSoft Is Latest Evidence Of Sea Change In Enterprise Apps Space 2

The enterprise applications landscape looks markedly different than it did just a few days ago, as the industry's long-expected consolidation shifted into fifth gear. Not only were two high-profile acquisitions announced in less than a week, but now Oracle is looking to muscle in on one of them.

Oracle launched a hostile takeover bid for PeopleSoft Inc. in the wee hours of Friday morning. PeopleSoft itself had announced earlier in the week that it would buy J.D. Edwards & Co., creating a company that would have approximately $2.8 billion in annual revenue, 13,000 employees, and more than 11,000 customers in 150 countries, the second-largest enterprise applications vendor behind SAP AG. That would drop Oracle into third place in the enterprise applications market.

Also during the week: Once high-flying Baan Co. was picked up for $135 million by an investment group consisting of Cerberus Capital Management LP and General Atlantic Partners LLC. They will merge Baan with SSA Global Technologies, another enterprise resource planning vendor they own. With nearly $600 million in revenue and almost 16,000 customers, the combined entity will be one of the largest ERP vendors in the manufacturing sector.

If Oracle succeeds in its hostile takeover play, it will become the clear No. 2 competitor to SAP, which has 54% of the market. And J.D. Edwards may become bait for another vendor with aspirations in the enterprise applications space: Microsoft. Oracle has said that it would want to complete the PeopleSoft deal first, then decide whether it will go forward with the J.D. Edwards deal--but many say it wouldn't make sense for it to acquire that company.

Thousands of customers headed out of their offices for the weekend wondering how the seismic shift taking place in the enterprise-applications space will affect their software investments--and thousands more will wonder in the future, as the buying trend accelerates. A depressed economy has made IT executives tight-fisted and less inclined to buy loads of new enterprise software. "The license revenue has just gone down for everybody, and for a lot of players it's been difficult just to keep their heads above water," says Bryan Funkhouser, a partner at consulting firm Deloitte & Touche. That makes many IT suppliers ripe targets, as the quickest route to new customers--and ostensibly more revenue--is through acquisition.

It will likely be weeks before the Oracle bid is resolved. It's not the first time Conway and Oracle CEO Larry Ellison have mulled a future together. In a conference call with analysts on Friday, Ellison said Conway approached him a year ago to discuss a possible merger of the companies. The deal didn't proceed, Ellison said, because they couldn't agree on a structure for the new company.

Oracle's offer of $16 per share--just a 6% premium over PeopleSoft's closing price on Thursday and well under its Friday closing price of $17.82--makes it unlikely that Oracle will prevail, says Yankee Group senior analyst Mike Dominy. However, Ellison positions the offer as being a "much safer road" for PeopleSoft shareholders than the alternative--an independent PeopleSoft, whose revenues are already under pressure, branching out to compete more directly with Oracle and SAP, and increasingly against Microsoft, which has been steadily growing in the market through its own acquisitions. Ellison pledged Oracle would give PeopleSoft customers flexibility in choosing which applications suite to run and automation tools to smooth the migration to Oracle's E-business Suite, for those who wanted it.

The premium that Oracle is offering highlights the low growth opportunities in the application software market, according to an E-mail brief issued by UBS Warburg analyst Heather Bellini. Some business-technology executives think increasing consolidation in the enterprise apps space is a good thing. In an information Research survey of 259 business-technology professionals, almost half consider the growing consolidation in the software industry to be positive, while 31% take a negative view.

But those who take a negative view have good reason to. Acquisition deals create a host of challenges. The flip side to customers potentially waking up to find their multimillion-dollar software no longer supported or upgraded is that vendors risk getting stretched too thin supporting multiple product sets and platforms. Some observers say innovation and interoperability suffer when vendors take a buy-versus-build approach, too.

Yet as the events of this week show, there's no stopping this speeding train. Even SAP--which says it has no grand acquisition plans on the scale of the Oracle or PeopleSoft proposals--is looking to acquire small software companies doing "innovative little things," according to Dennis Moore, senior VP of cross-applications for SAP Labs, who spoke at a Technologic Partners' Enterprise Outlook conference last week.

And the combined SSA GT and Baan have their eye on acquiring more software companies with expertise in the manufacturing sector, says Baan president Laurens van der Tang. Some speculate that one such target is Manugistics Group Inc., which had General Atlantic Partners as one of its original investors.

If PeopleSoft's purchase of J.D. Edwards is blocked by Oracle, it's not inconceivable that Microsoft would take advantage of the situation. "Digesting both PeopleSoft and J.D. Edwards at the same time would definitely be a more complicated situation" for Oracle, Dominy says, so they may just cede the mid-market to Microsoft, which already is making strides in the small business space with its own CRM product as well as apps it acquired from Great Plains and Navision. A Microsoft acquisition of J.D. Edwards would give Microsoft access to several thousand IBM iSeries and AS/400 users whom it could migrate to Microsoft infrastructure, he says.