Sold! PeopleSoft goes to Oracle for $10bn

PeopleSoft's board of directors has approved a takeover deal with Oracle worth around $10.3bn, ending a long-running and bitter battle and creating a major software maker.

Oracle had been scheduled to appear in court on Monday for a hearing on PeopleSoft's "poison pill" anti-takeover defence. The lawsuit was one of several that had been filed in the course of the hostile takeover bid.

Instead, Oracle announced on Monday that PeopleSoft's board had agreed to a deal valuing PeopleSoft at $26.50 per share, higher than Oracle's "final bid" of $24, and a roughly 10 per cent premium over PeopleSoft's closing price on Friday.

Larry Ellison, Oracle's chief executive, said in a conference call early on Monday with analysts: "Their maintenance revenue was higher than we thought and their expense number was lower than we thought. It showed their maintenance business was more profitable than we thought."

This realisation about PeopleSoft's maintenance business occurred after Oracle was able to review its rival's financial books as part of the negotiation process, Ellison said. "Before we were allowed to look at their books, our estimates had to be conservative."

The deal between the business software makers is expected to close at the end of January. Oracle said the merger should add about once cent per share to its bottom line starting in the fourth quarter of its fiscal year, and two cents per quarter in fiscal 2006.

The company also indicated that it intends to provide a lifeline for companies using software from PeopleSoft and JD Edwards, which PeopleSoft itself acquired during the course of its 18-month battle with Oracle.

Oracle plans to retain senior engineers from the two software makers to develop an upgrade to PeopleSoft 8 and to roll out a PeopleSoft 9 and JD Edwards 6 in the next 12 to 24 months, Ellison said. He added that the PeopleSoft and JD Edwards development teams would operate separately from Oracle's engineering team.

"We will also take senior engineers from Oracle and have them work with PeopleSoft engineers in developing a combined product. PeopleSoft 10 would likely be the merged product... PeopleSoft 10 is likely 30 to 36 months out," Ellison said.

Although Oracle plans to reduce its research and development budget by $150m for the combined company, Ellison said the cut is expected to spread equally between Oracle and PeopleSoft.

Some members of PeopleSoft's sales team will be retained after the merger to increase Oracle's current sales staff by 50 per cent, Ellison said.

PeopleSoft's board said the final offer "provides good value" for the company.

"After careful consideration, we believe this revised offer provides good value for PeopleSoft stockholders and represents a substantial increase in value from October. PeopleSoft is a strong and vibrant company," A. George "Skip" Battle, chairman of PeopleSoft's transaction committee, said in a release.

"This has been a long, emotional struggle, and our employees have consistently performed well under the most challenging of circumstances. The Board salutes our employees for their outstanding dedication to PeopleSoft and is grateful to our customers who have continued to buy our products and stand by us during these uncertain times," Battle said.

PeopleSoft said the two companies would stay the various ongoing lawsuits over the merger and dismiss them once the deal is final. Beyond sparring with PeopleSoft over the poison pill defence, Oracle has fought with the Department of Justice, European regulators, and various shareholder groups to win PeopleSoft.

The battle over the deal also cost former PeopleSoft chief executive Craig Conway his job.

The deal will create a major force in the software world, and could bring significant customer revenue to Oracle.

"We will have twice as many customers and be the number one applications vendor in North America and in banking," Ellison said. "We will also be strong in health care and government. And the merger will also give us a strong installed base to sell into."

There has been concern among PeopleSoft customers that Oracle would no longer continue support for various PeopleSoft applications, including ones acquired from PeopleSoft's purchase of rival software maker J.D. Edwards.

But last week, Oracle president Safra Katz said the company would "oversupport" PeopleSoft's existing 12,750 customers to help keep their business if a merger were clinched.

Separately, Oracle reported on Monday that its net income rose 32 per cent in the second quarter on strong database software sales.

The company reported second-quarter net income of $815m, or 16 cents per share, compared with $617m, or 12 cents a share, a year earlier.

Analysts were expecting the company to report earnings of around 14 cents per share.

Revenue climbed by 10 per cent, to $2.76bn, fuelled by a 14 per cent growth in new software licence sales, Oracle said.

Ellison said the PeopleSoft merger will satisfy his company's appetite for major mergers for a while.

"We have been clear that we'd entertain other acquisitions, but we won't do any other major mergers until it's clear to us we have integrated this one to our satisfaction," Ellison said. A major merger, he explained, is one that carries a price tag in excess of $200m.

Margaret Kane and Dawn Kawamoto write for CNET News.com.