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Oracle rests case as antitrust trial winds down

An economist says the merger would aid competition. Papers show IBM looking nervous.

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By Alorie Gilbert
Staff Writer, CNET News.com

SAN FRANCISCO—After calling a professor of economics as its final witness, Oracle rested its case Thursday, ending testimony in its antitrust battle with the U.S. Justice Department.

The final day of testimony—with closing arguments set for July 20—included documents underscoring IBM's role in the market, and followed yesterday's revelation that the controversial CEO of Computer Associates International had advised Oracle on the takeover attempt.

The day's opening witness in the U.S. District Court trial was David Teece, a professor at the University of California, Berkeley, Haas School of Business. Teece predicted, contrary to Justice Department arguments, that Oracle buying PeopleSoft would bring greater innovation to the software industry. The acquisition would let Oracle expand its research and development activities and keep its prices down to compete with rivals IBM, SAP and Microsoft in applications and related software markets, he said.

"This is an important dimension that (the government) has ignored," Teece said.


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Oracle argues that a PeopleSoft acquisition would help it compete against powerful competitors, namely IBM, SAP and Microsoft. The Justice Department says the deal would stifle competition in the corporate applications market, where IBM and Microsoft don't currently play.

The U.S. Justice Department opposes Oracle's $7.7 billion bid to purchase an unwilling PeopleSoft. The government's antitrust argument is the issue of the nonjury trial. Attorneys on both sides will have until July 20 to file post-trial briefs and other documents before making closing arguments. Judge Vaughn Walker is expected to issue a ruling in August or September.

Scaring Big Blue
Also on Thursday, Oracle presented fresh evidence that its bid to acquire PeopleSoft was viewed as a threat by IBM. Oracle has argued that IBM's keen interest in the PeopleSoft deal shows that the competitive dynamics of its business are broader and more complex that the U.S. Justice Department claims.

In a slide presentation submitted by Oracle as evidence, IBM lamented the prospect of the applications market consolidating into the hands of database rivals Oracle and Microsoft. "We are exposed to potential consolidation of the (independent software vendor) space, especially to acquisitions by the hostile players," the slides stated.

The presentation, "Implications of the PeopleSoft/JDE/Oracle merger and ISV consolidation on IBM," is dated June 13, 2003, about a week after Oracle launched its hostile $7.7 billion bid. ISV stands for independent software vendor, and JDE refers to J.D. Edwards, the software company acquired by PeopleSoft last year.

With Oracle's move to acquire PeopleSoft, IBM contemplated how to "establish more control over the acquisitions in this space," the document states. Among its options, IBM considered acquiring "blocking stakes" in key software companies and launching lobbying efforts against certain mergers with "customers/influencers/regulators."

IBM sells middleware and database software to a large number of SAP, PeopleSoft and Siebel Systems customers. Those software partners design their programs to work with IBM's technology. The underlying concern was that IBM would lose those customers if IBM-friendly applications suppliers were gobbled up by rivals that don't support its infrastructure, such as Oracle.

Another slide, entitled "Predator's Ball," indicates Oracle wasn't the only merger-hungry rival IBM worried about. The slide lists Microsoft, Oracle, Accenture, Hewlett-Packard and SAP as predators with arrows to "potential targets" in the next column that includes PeopleSoft, Siebel, Lawson Software, Ariba, Intuit, Manugistics and about a dozen others.

The slides could also undermine the credibility of IBM executive Nancy Thomas, a government witness who testified that Oracle's proposed merger would harm customers.

Oracle sought CA's antitrust advice
Another revelation to emerge from the trial this week was that Oracle co-President Charles Phillips met with Sanjay Kumar, then CEO of Computer Associates International, shortly after Oracle launched its PeopleSoft bid to discuss how to handle an antitrust inquiry and other takeover issues.

Phillips discussed the meeting in an e-mail to Oracle Chairman Jeff Henley, dated June 27, 2003—a couple of weeks after the company launched the PeopleSoft bid. The government submitted the e-mail as evidence in its case on Wednesday.

Kumar, whom Phillips called "the master of software deals," counseled Oracle against being too frank about its post-merger plan to phase out PeopleSoft's products, according to the e-mail. "He said he would have the same plan post-acquisition, but just would not have said so up front," Phillips recounted in the e-mail. "Everyone knows but you can't say it and freak out the customers up front."

Kumar also told Phillips that the PeopleSoft money-back guarantee program, designed to deter Oracle from buying PeopleSoft, is a "nonissue." The program, which PeopleSoft management introduced shortly after the hostile bid, creates a multimillion-dollar liability for Oracle if it pursued the merger. CA faced a similar situation in its acquisition of Platinum several years ago, but paid nothing.

"He says there is good case law that says one party can't purposely obligate another party with bad intent and no consideration for that obligated party," the Phillips e-mail states.

"He also told other customers that if they tried to collect on that, they'd end up forgoing discounts on every CA product in the future. Once we own PeopleSoft, those customers will want good relationships with us, and most them are database customers."

PeopleSoft has relied on the money-back guarantees for the past year to keep its sales up as it fought the hostile Oracle bid. Without it, prospective customers may shy away from the company fearing their purchases would be at risk, PeopleSoft has said.

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