PeopleSoft's board on Wednesday rejected Oracle's "best and final" offer, but as shareholders weigh the $9.2 billion bid, PeopleSoft executives anticipate a proxy battle.
PeopleSoft's board, in rejecting the $8.8 billion cash deal, asked shareholders to keep their stock, saying the company is worth more than Oracle's cash bid of $24 a share. The total transaction is worth $9.2 billion.
But PeopleSoft expects its shareholders to meet Oracle's demands anyway, which would send the two companies into a proxy battle for control of its board, PeopleSoft executives and board members said during a teleconference with securities analysts on Wednesday.
"Shareholders may tender their shares to Oracle for a variety of reasons," said PeopleSoft board member George "Skip" Battle, the lead director on PeopleSoft's transaction committee. "We will continue to talk to shareholders past the expriation of the tender offer and through to the shareholders meeting."
Oracle has said that this offer, its fifth since launching its bid in June 2003, will be its last attempt to acquire its rival in the business software market. Shareholders must bring more than half of the outstanding shares to the table, or Oracle will give up. "Oracle has been at this for a year and a half, and it is now time to bring this matter to a close," Oracle CEO Larry Ellison said in a statement issued in reaction to the PeopleSoft board's decision. "On Nov. 19, we will respect the will of the shareholders."
Dave Duffield, CEO of PeopleSoft, put a positive spin on the vote and the company, which has suffered during the protracted takeover battle.
"The board concluded that PeopleSoft is worth substantially more than Oracle's latest offer," Dave Duffield, PeopleSoft chief executive, said in a statement. "We are a vibrant, strong company with a focused, motivated management team and employee base dedicated to executing on the company's plan."
PeopleSoft consulted with financial professionals at Citigroup Global Markets and Goldman Sachs on its decision to reject the offer, the company said. Oracle Chairman Jeff Henley said shareholders will have to decide what to do with their investment.
"We believe our offer represents a substantial premium over PeopleSoft's standalone value now or in the foreseeable future," Oracle Chairman Jeff Henley said in the statement. "We leave it to PeopleSoft's shareholders to decide whether PeopleSoft's current management can deliver better shareholder value now, or within any reasonable investment horizon."
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Oracle will put more stock in what the shareholders decide than in the board's decision, which was not a surprise. Shareholders have until Nov. 19 to tender their shares.
Anticipating that Oracle will, in fact, get half of the shares by Nov. 19, PeopleSoft President Kevin Parker sought to downplay it ahead of time, calling it "a nonbinding straw pull."
Each company would have several months to wage a proxy battle ahead of PeopleSoft's annual meeting next spring, when shareholders vote to fill half the director seats on the board. PeopleSoft has not yet set a date for the meeting, which was held last year on March 25, but said Oracle would have to propose an alternate slate of directors by the end of November.
Already looking to sway shareholders their way, PeopleSoft executives said on Wednesday that they have a plan to increase software revenue by as much as 10 percent next year and boost profit margin to 20 percent from 16 percent to 18 percent projected for the current quarter.
The key to improving its financial picture, executives said, is a plan to introduce new products, including software by subscription, and a stronger partnership with IBM, which the companies discussed in September. The company also plans to cut marketing and research costs, though it doesn't anticipate significant layoffs related to that effort.
PeopleSoft shares closed Thursday at $22.79 and sank in after-hours trading to $22.35.
The company noted that since the beginning of the year, it has generated $422 million in license revenue and has added 418 new license customers. It also has increased its total deferred maintenance by approximately 9 percent and has generated $248 million in incremental cash.
The future's so bright...
PeopleSoft said another reason it rejected Oracle's offer is that it expects to post "substantial sequential growth in license revenue and...earnings" in the fourth quarter.
The company also anticipates a strong fiscal 2005 due to its license revenue growth and a full year of revenue and cost savings from its recently completed merger with J.D. Edwards.
In addition, PeopleSoft took issue with the value Oracle placed on the deal as compared to other mergers in the enterprise software industry.
"Despite the strategic value of this transaction to Oracle, the offer price values the company at multiples far below those paid in comparable transactions in the enterprise software industry," PeopleSoft said in a statement.
Many industry watchers had speculated that PeopleSoft's board would reject the deal, given they had turned down Oracle's offer of $26 a share in February. Oracle, which later lowered its offer to $21 a share in May citing its rival's declining market price, said PeopleSoft's deteriorating condition did not warrant a higher price than the offer it issued earlier this month.
Spitting out the poison pill
Oracle hopes to win over PeopleSoft shareholders as a means to put pressure on its rival's board of directors. The company is hoping a shareholder mandate will prompt PeopleSoft's board to waive its shareholder rights plan, otherwise known as a poison pill. Poison pills, if triggered, would flood the market with the shares of the takeover target, making it too costly for the rebuffed suitor to acquire those shares.
Oracle recently concluded its trial in Delaware Chancery Court, where it was seeking to remove PeopleSoft's antitakeover measures. Trial testimony had led some courtroom observers to speculate that PeopleSoft's position on an Oracle merger was softening, especially after the company had fired Chief Executive Craig Conway, who had remained adamantly opposed to the deal.
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If Oracle's attempts to remove the poison pill fails, the company may opt to run its own slate of dissident directors, a step it had begun before federal antitrust regulators unsuccessfully launched a legal challenge to the deal.
The purpose of a dissident slate is to remove those directors up for re-election and replace them with candidates who would be more inclined to remove the poison pill. Hence, a merger could later ensue.
Should Oracle ultimately take this path, any resolution on whether a PeopleSoft merger will occur may not be known until sometime next year. That's when the software vendor holds its next annual shareholders meeting, stretching the proxy battle into nearly a two-year affair.