Enterprise Software

Consolidation in the enterprise applications market: Oracle, PeopleSoft, and JD Edwards

The acquisition news of JD Edwards by PeopleSoft was followed days later by Oracle's bid to buy PeopleSoft. What does all this mean for enterprise applications? This week's Analyst Views takes a look.


On June 2, 2003, PeopleSoft announced an agreement to acquire JD Edwards. On June 6, Oracle announced a hostile attempt to buy PeopleSoft. Sounds like a TV miniseries, doesn't it? This is the most excitement we've seen in the IT industry in many years (the last big hostile takeover I remember was IBM's play for Lotus).

Let's take a look at these in the order in which they happened. This week, we'll look at the PeopleSoft/JD Edwards deal.

PeopleSoft's bid for JD Edwards
This acquisition, between the third- and fourth-place players in the enterprise applications space, would have significant market impacts if it moves ahead. First, enterprise application vendors have hit a wall trying to get new license revenue. (PeopleSoft and JD Edwards get only 27 percent and 22 percent of their revenue, respectively, from licenses.)

In this market, it has become a game of who has the most customers who are paying for maintenance, support, and services. For PeopleSoft, that combination represents 72 percent of its revenue. At JD Edwards, it’s even higher, with 78 percent of its revenue coming from services and support. Combined, the two companies would have a net income of $230 million and assets of $3.7 billion. (These figures were taken from PeopleSoft and JD Edwards press releases as well as reports from Gartner, AMR Research, and the451.)

By merging the two companies, PeopleSoft would have a base of nearly 12,000 customers, each of which has the potential of providing ongoing service revenue. Combined, the two companies would offer HR, ERP, CRM, SCM, and financials products and have a complete covering of all significant vertical markets.

Add to this the possibility of cross-selling these customers and of moving PeopleSoft’s high-end applications down-market through JD Edwards’ channels and moving JD Edwards' midmarket solutions upmarket using PeopleSoft’s channels, and it’s easy to see why this deal was attempted.

Second, the combined company would jump to a strong second-place position in the ranking of enterprise application vendors. The new PeopleSoft/JD Edwards combination would leapfrog Oracle, leaving it behind only market leader SAP.

Many of the analyst firms have provided their views on the new competitive landscape that would be produced by this deal. Here is a summary of what’s been said:

the451
“PeopleSoft should be able to give SAP more to think about, as one of the only companies to offer a broad range of enterprise applications from the mid-market to the high end in the key areas of human resources, financials, ERP, manufacturing, distribution, and supply chain. This deal will also prick up ears at companies such as i2, Manugistics, Microsoft, and Oracle as to what it says about their prospects in those areas where they compete with the enlarged PeopleSoft…. Lawson will probably be wary of a smooth integration, as PeopleSoft could apply all the lessons JD Edwards has learned over the years to the vertical markets where it competes with Lawson, such as healthcare, financial services, and the public sector.”

Aberdeen Group
“The deal makes a lot of sense from both a product and business standpoint—creating a new powerhouse capable of challenging SAP for enterprise application hegemony and with the resources to withstand the upward assault by Microsoft from the lower part of the market.”

AMR Research
“Both companies were finding it increasingly hard to compete globally and domestically against mammoth SAP in such a depressed technology economy. JD Edwards posted its first loss in six consecutive quarters and a 20 percent decline in license revenue. Likewise, PeopleSoft has seen its stock value tumble more than 50 percent and recently warned of much lower revenue for the year compared to 2002. They will now have solid footing against SAP.”

Forrester Research
“The combination will crush SAP's hopes for midmarket momentum. This acquisition crushes the mySAP All-in-One offering, a downscaled version of mySAP aimed at the upper end of the midmarket. JDE is entrenched in this area and can be expected to further dominate with PeopleSoft's marketing muscle…. The combination will give Oracle and Siebel Systems heartburn. The PeopleSoft/JDE combination spells further trouble for other big-app ISVs. Oracle's struggling apps business has declined to 26 percent of total Oracle revenue. Meanwhile, Siebel, which should have scooped up JDE, is increasingly looking like a services vendor.”

Current customers
What about the impact of the acquisition on current PeopleSoft and JD Edwards customers? According to Gartner, “Customers will likely not feel an impact from this acquisition until at least mid-2004. As details about the merger's execution emerge, the impact on specific products will become clearer. Customers and prospects should consider newly available information with each purchase and upgrade decision.”

Aberdeen Group also had some comments on the effect on current JD Edwards customers: “JDE customers need to carefully listen to their new vendor over the coming months to understand how their product line evolution will be handled and what it means for them. We don't expect any product lines to be dropped; the maintenance stream is too strong and the risk of losing customers at new product transition is great; however, enterprises should be alert to ‘product stabilization’ polices, which is vendor-speak for significant reduction in on-going R&D for older products in favor of a new (or surviving) primary product line."

AMR Research believes that customers have little to worry about. It claims that “customers won’t see much immediate difference from their vendors. (The two companies’ CEOs were quick to point out when announcing the news that no changes in product support were anticipated.) We don’t expect the product lines will be merged or that the new company will try to force customers to migrate.”

For additional coverage on the enterprise application market, visit the Analyst Views Hot Topics section and view the Enterprise Applications, ERP, or CRM sections.

What's ahead?
Even if the Oracle takeover attempt hadn't occurred, the deal wouldn't have closed until Q4 of this year and would have been subject to the approval of the regulators and the shareholders of both companies (approval is expected from both groups). If the Oracle threat goes away and the deal closes, customers should expect to see very little in the way of substantial changes during the next year, especially since JD Edwards would be run as a wholly owned subsidiary of PeopleSoft.

PeopleSoft also announced that it intended to realize $80 million in cost savings once the deal is done. Most analysts believe the savings would come through consolidation of sales forces and back-office and marketing functions. These cost savings will probably mean layoffs, so customers might see some new faces in their sales and support contacts.

Most analysts agree that this has the potential to be a good deal for the vendors and their customers—if it ever is allowed to come to completion. Most analysts, however, aren't casting a favorable look on the Oracle hostile takeover attempt of PeopleSoft.

Next week, we'll take a look at the Oracle takeover attempt and review what the leading analysts are saying. If you can't wait, you can read all the analyst’s views on the deal and takeover attempt at the Analyst Views “Oracle/PeopleSoft/ JD Edwards” Focus Section.

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