Marshalling the Brainwork for the Front Lines of an Epic Antitrust Battle

Oracle’s battle to buy PeopleSoft may look tame once opposing armies of legal, economic, and technology heavyweights begin their intellectual slugfest as part of government efforts to stymie the deal. The intensity of the contest, scheduled to unfold in court starting in June, underscores the high stakes for all sides. The outcome of the case could determine the future competitive landscape of the software industry and related tech sectors – as well as the ability of key players to change the environment through m&a. Dealmakers are eager to see how the government fares after striking out in a 2001 tech merger case that many regard as a warmup to Oracle/PeopleSoft. As with many antitrust contests, the pivotal point is the configuration of the customer market – in this case for the up-market software offered by both firms. That central issue is complicated by a mix of orthodox economics – market share, pricing power, entry barriers, etc. – with new-age factors including the continual evolution of technology industries like software. The interplay could be replicated in future screenings of technology mergers. In a complaint filed in the U.S. District Court for Northern California, the Antitrust Division of the DOJ and seven state attorneys general define the market as large companies that buy “high-function” or “enterprise” software. Although these customers can use the software to run a multiplicity of operations, the complainants singled out human resources and financial as the primary functions at issue. According to the complaint, “enterprise customers” use the heavy-duty software to cut costs but could face rising prices if the supply side were cut to two vendors – a combined Oracle/PeopleSoft and market leader SAP. By contrast, regulators said, smaller and mid-sized businesses have simpler needs, can use “off-the-shelf” software, and have many more supplier choices. Oracle’s rejoinder, spearheaded by David Wall of Latham & Watkins, is that the market is not so constricted, competition is far broader than the government alleges, and entry barriers aren’t high. The answer states that customers can go to other suppliers, including Microsoft Corp., which now targets mostly mid-sized buyers, and niche players, whose specialized offerings allow a mix-and-match formulation of software packages. In a strange twist, SAP is supporting the merger, even though it would have to fight a larger gorilla if the deal goes through. Lee Anne Washington, Senior Editor of the Takeover Stock Report and a former DOJ attorney, thinks the market definition is “narrow,” although, in fighting cases, it is not unusual for regulators to define a market segment by the size of the customer. Yet, she notes that while Oracle’s argument of wider competition has a point, the smaller players it proffers as competitors may not be able to satisfy big customers. Antitrust litigator William Vigdor of Vinson & Elkins said the decision might hinge on what kinds of choices or alternative suppliers customers actually enjoy. “My guess is they have some big companies in there saying they actually find some limitations on their alternatives.” “The defense here is largely entry barriers – that Microsoft is looking to enter, that others are looking to enter. The questions are how much higher the cost, how much less the reliability, how much more of a reputation are you going to bet on before you buy this [a smaller rival’s] software. The complication is that many of these software packages have hardware with them and are already locked into a system, so you’re really talking about upgrades,” Vidgor adds. Emboldening Oracle supporters is the DOJ’s 2001 defeat in blocking SunGard Data Systems from buying Comdisco’s disaster recovery operation, in a move that reduced head-on competition from three to two. Vigdor said SunGard won by showing that customers had alternate choices, including running their own backup systems. “My guess here is that the government will focus on those who can’t switch [suppliers],” he said. Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com