Application market set for big shake-up

Oracle's $5bn (£3bn) hostile takeover bid for PeopleSoft will kick-start a period of major change and consolidation in the application software industry.

For a sector typically regarded as slow and uneventful, last week's events were tumultuous.

The plan by PeopleSoft and JD Edwards for a $1.7bn merger was well received by most analysts.

But Oracle chief executive Larry Ellison was not going to allow his rivals to merge and create a larger application software business than his own without a fight.

Ellison's carefully considered revelation that PeopleSoft chief executive Craig Conway approached him in June 2002 to discuss a merger raised doubts about the viability of his rival.

His proposal would see the end of PeopleSoft and any new development of its products.

Ellison called it a "blending of the clever people in PeopleSoft and the clever people in Oracle".

"We think shareholders will see the merger with JD Edwards as a risky undertaking," he said.

But Oracle's $16 (£9.72)-per-share offer led some experts to question the motivation for the bid and its chances of success, especially as PeopleSoft shares quickly rose above that price.

"This is a clearly a reaction to the JD Edwards acquisition and is an effort either to kill the deal or wound PeopleSoft," said AMR Research analyst Nigel Montgomery.

Oracle's bid will expire on 7 July, but could be extended, according to the formal take-over filing with the US Securities and Exchange Commission on Monday.

PeopleSoft and JD Edwards executives were dismayed at Oracle's attempts to scupper the deal they spent eight months working to agree.

Conway called the move "atrociously bad behaviour from a company with a history of atrociously bad behaviour."

JD Edwards chief executive Bob Dutkowsky, speaking at the company's annual user conference in Denver, Colorado this week, was equally dismissive, suggesting that US and European anti-trust authorities would be likely to block Oracle's plans.

But if the PeopleSoft acquisition falters, JD Edwards has other options, he says.

Whatever the outcome of the competing acquisitions, the changes in the application software industry will be widespread, with many smaller suppliers inevitably coming 'into play' as possible targets.

Just last week, two US private equity firms bought Dutch software firm Baan with the intention of merging it with rival SSA Global Technologies, creating a strong niche software player.

In the short term though, the biggest winner is likely to be the market leader, SAP.

No matter what happens, the German giant will still be bigger than all its rivals put together, says spokesman Markus Berner.

Some analysts say there are wider and more significant implications to the plans of the major applications software providers.