ERP consolidation underway as Oracle toughs it out for PeopleSoft and JD Edwards

In just four days last week the top end of the enterprise software market has been seriously rattled. First PeopleSoft declared its intention to buy rival JD Edwards for $1.7bn. Two days later it was itself the subject of a bid by Oracle of $5.1bn, but not initially including JDE. Separately, Baan was sold to the global private investment group that owns SSA Global Technologies. Those who remember the big five of JBOPS (JD Edwards, Baan, Oracle, PeopleSoft and SAP) will note that it’s about to diminish to OPSS (Oracle, PeopleSoft, SAP and SSA GT) or, temporarily at least, JOSS or simply OSS. This is consolidation of the serious league software industry big time, and pundits are wondering, in what continues to be a very tough market for IT in manufacturing, not only about the outcome and what it means for users and the companies concerned – but who’s next. In fact, that view only holds for the Oracle, PeopleSoft and JDE sides of the story. The Baan story is quite different: it’s been in the making for some long time. Bann parent Invensys’ catastrophic woes were clearly going to force it to some radical thinking beyond its first round of major company sell-offs. So it was little surprise that Baan should emerge with a for sale sticker in a second round (MCS, May 2003, page 9). SSA GT was immediately hot favourite. Returning to the big one, sources suggest that Oracle’s bid for PeopleSoft may well be little more than a very large spoiling tactic. Oracle CEO Larry Ellison paints a very different picture: he confirms that talks with PeopleSoft about acquisition took place, but failed, more than a year ago. He also says that both PeopleSoft shareholders and customers would benefit from the deal. That’s tough to see. PeopleSoft’s share price rose on the news well beyond the Oracle 6% above offer, making it appear under-valued. As for users, Oracle makes it plain that it would sunset the PeopleSoft suites and push to ‘upgrade’ to Oracle applications. While on the surface, functionality and the 100% Internet architecture of both firms’ ERP and associated systems may make that sound relatively painless, manufacturers that have gone through an implementation are unlikely to concur. As for the companies themselves, we’re looking at market share and customer base improvement keeping Oracle the second largest ERP and supply chain company behind SAP. There’s also some product feature integration for Oracle, in a move that the firm says will be profitable from the first quarter. Cost savings would come through rationalisation of PeopleSoft. Meanwhile, the PeopleSoft and JD Edwards alternative deal currently involves PeopleSoft offering around $1.7bn for JDE in stock, and pushing Oracle off its number two perch to what would be number three behind the new combination. This pair has approximately $2.8bn in revenues, 13,000 employees and more than 11,000 customers in 150 countries. The plan would be for JDE to continue initially as a wholly owned PeopleSoft subsidiary under 25% 75% ownership. Rationalisation and cost reduction would no doubt follow, but from existing users’ perspective, it seems certain that the product ranges would be preserved at least in the short term. Assuming that acquisition goes through, by autumn PeopleSoft would gain a much bigger foothold in mid to large scale manufacturing than is currently the case. JDE’s chairman and CEO Bob Dutkowsky said: “With PeopleSoft’s strength in the large enterprise space and services industries, combined with D Edwards’ position as an acknowledged leader in the mid-market and manufacturing, we will be able to serve the entire enterprise software market.” Words were less kind of Oracle’s intention. PeopleSoft president and CEO Craig Conway called Oracle’s cash tender “atrociously bad behavior from a company with a history of atrociously bad behavior. Obviously it is a transparent attempt to disrupt the acquisition of JD Edwards by PeopleSoft announced earlier this week.” Even the mighty SAP, not given to such commentary, released a statement from spokesperson Markus Berner: “It is not SAP’s policy to comment on the business strategies of our competitors, but in general, hostile takeovers have a tendency to disrupt customer relationships.” He also made the point that SAP would remain by far the dominant player with 54% market share. It’s also worth noting that disaffected PeopleSoft users might well look to SAP as their way out. Beyond that, put the gloss and the massive figures to one side and the consolidation confirms tough times for these companies. JDE, although with six profitable quarters to its credit, announced a loss in its latest quarter, notably with a 20% fall in license revenue. PeopleSoft, although facing a broad range of markets beyond manufacturing, has been warning of lower revenues for this year. And Oracle’s own applications penetration has been less than spectacular. Not only is SAP’s ongoing success to an extent at the expense of its big rivals; they are still suffering from being geared for growth figures of the late ‘90s. Even though IT spend in the UK at least is now static and set to rise in 2004 – and the indications are that this is global – no one is suggesting uptake back at those levels. Truth is, Oracle can’t lose. If it gets PeopleSoft, it’s probably got a bargain given the current share price, boost to its customer base and so on. If it doesn’t, it will have made PeopleSoft work very hard to avoid takeover – by, for example, changing its offer for JDE from stock to cash. Meanwhile, Invensys’ struggle is quite different. That stems right back from its formation out of the merger of then Siebe and BTR in 1998. Punters that blame the firm’s misfortunes on its purchase of Baan – which has been a bit of an albatross – are misguided however. The firm’s issues have to do with its sheer diversity, poor timing and entrenchment in global industries that just aren’t growing enough to pay the bills. And hence its disastrous £1.4 billion loss for last year. So Cerberus Capital Management and General Atlantic Partners have mopped up what actually is, and always has been, a very good mid to large manufacturing market ERP-plus company in Baan for a mere $135m (£83m). Three years ago Invensys paid £470m. It’s about the best outcome for Baan and probably for its manufacturing users. The group’s treatment of SSA GT has been good, and that firm has been acquisitive and in growth mode that far exceeds its performance prior to going under and being purchased. Adding Baan to the SSA fold ranks the latter at number four in the ERP giants league. Baan’s fit with SSA GT, with which it will be combined, is also as good as it gets in terms of geography and detailed market and IT platform gaps, although there is overlap and inevitably the likelihood of rationalisation. Bottom line is that the new firm, initially with separate branding and so forth, has $600m revenues and 16,500 users. Put the doubters aside. This firm can’t afford to sit back on maintenance revenues and only selling more services and licences to existing users: there may be issues around choice of development, but this looks set to be a major player again.