EU makes a stand on PeopleSoft

European antitrust regulators announced on Monday that they're extending their review of Oracle's hostile bid for PeopleSoft into an in-depth second phase.

The decision by the European Commission, which serves as the antitrust agency for the European Union, will prolong the review by up to four months, a move that was largely expected given the size of the deal and Oracle's presence in Europe.

The Commission said in a press release: "The Commission will, in particular, investigate the impact of the transaction on the markets for business applications software used by large multinational companies to coordinate and plan their financial and human resources and their relationship with customers, among other things."

European regulators also said their initial one-month investigation has shown that a possible merger of two of the largest competitors in the business applications market merits a closer examination because "the number of key players would be reduced from three to two - Oracle and SAP - in certain applications software markets."

In addition to looking at the effects on the business applications market, European regulators may also review the potential effects to the relational database market, Oracle's core strength.

Steve Swasey, a PeopleSoft spokesman, said: "The European Commission's decision is consistent with what we have said before. Oracle's unsolicited tender offer faces serious antitrust concerns. Our board has previously said there was a significant likelihood the deal would be prohibited."

During the four-month investigation, European antitrust regulators can make a decision at any point to approve the deal, allow it to go through with modifications, or reject it.

Oracle spokesperson Jim Finn said in a statement: "We have said before that we felt a phase-two review would be initiated, so we are not surprised by the European Commission's decision. We continue to work closely with the EC throughout this process. We are in this for the long haul and we remain committed to completing our intended acquisition of PeopleSoft."

Although European regulators are moving the Oracle-PeopleSoft case into a second phase, it does not necessarily mean the commission will challenge the deal.

However, under Competition Commissioner Mario Monti, the European Union has been more aggressive on challenging mergers, said Stan Gorinson, who heads the antitrust efforts at Kilpatrick Stockton in Washington DC, and formerly served as antitrust chief of the Justice Department's special regulated industries unit.

Gorinson also noted that the commission's decisions have been reversed on several occasions within the last year.

"The EC has had three or four cases reversed in the Court of First Instance," Gorinson said. "They have been criticised for their analysis, with the court saying it did not have economic or factual support."

While the success of Oracle's takeover bid appears, in part, to rest on how broadly, or narrowly, regulators define the relevant markets, it will face an "uphill climb" after regulators have publicly redefined those areas of interest, said one former high-level antitrust attorney in the US Department of Justice.

"It will be difficult for Oracle to prevail," the attorney said. "Although SAP has a huge market share lead, the issue is not whether this deal would create a monopoly. The question is whether if PeopleSoft and Oracle merge, will it raise prices, even incrementally, and make it stick for some time."

However, the attorney added that the way the European regulators have defined the relevant market is not necessarily how the Justice Department will view it.

Meanwhile, the US Department of Justice is deciding whether to challenge Oracle's takeover bid. Oracle has previously said it expects the Justice Department to wrap up its antitrust review by December or January.

Europe has played a significant role in Oracle's first-quarter earnings performance. Revenue from the region, combined with the Middle East and Africa, represented 35 per cent of the company's total revenue in that quarter, and contributed a nine per cent year-over-year increase in new license revenue. The company posted a six per cent decline overall.

Oracle's archrival in the business applications market is SAP, based in Germany. SAP holds the largest market share, with a substantial lead, while Oracle and PeopleSoft are in a close race for the number two slot. SAP, meanwhile, has widened its lead, attributing its sharp rise in third-quarter revenue to confusion in the marketplace.

State attorneys general from 38 states and Canada's Competition Bureau are also continuing to review Oracle's hostile takeover bid.

Dawn Kawamoto writes for CNET News.com