- The Washington Times - Sunday, February 29, 2004

It was only a couple of years ago that Larry Ellison, the charismatic CEO of Oracle Corp., was urging the dogs of antitrust to chase down Bill Gates and Microsoft. How things have changed. Somewhere along the way, the pups got loose and turned on him. Now Oracle itself may wind up feeling the antitrust bite.

At issue is Oracle’s effort to acquire PeopleSoft, a competing supplier of business software — a move Justice Department staff members recently said they oppose.

Last June, Oracle put in a $5.1 billion bid for the company (since rising to $9.4 billion earlier this month.) The PeopleSoft board rejected the offer, setting off a classic takeover battle. The storyline was a simple one and one familiar to Mr. Ellison: a large, octopus-like software company vs. a plucky rival fighting to survive.

A climactic PeopleSoft shareholder meeting to vote on Oracle’s offer is set for late March. PeopleSoft’s board adamantly opposes the acquisition and is urging shareholders to reject it. But even if shareholders approve, the deal must get past a pack of antitrust authorities, as state, federal, European and even Canadian regulators investigate the takeover attempt. And the Justice Department is expected to decide whether to accept its staff’s recommendation by March 2.

The question for U.S. antitrust regulators is whether the merger would substantially lessen competition in the relevant market. But what exactly is the relevant market here? The bulk of Oracle’s business is in databases, but PeopleSoft doesn’t play in that field. The two do, however, go head-to-head in a lower-profile market known in the software industry as “ERP” — “enterprise resource planning.” Essentially, this is the provision of software to help businesses with such things as inventory, customer service and human resources.

As it turns out, neither Oracle nor PeopleSoft dominate this market either. The leader is a German firm, SAP, which by one measure has 25 percent of that market. Oracle and PeopleSoft have around 7 percent each. Rather than reduce competition, combining the latter two could actually increase competition to SAP (a point that European authorities, who have been known to use competition laws to help local favorites, are unlikely to miss).

To get around these inconvenient market-share numbers, the Justice Department staff is reported to have come up with a fairly novel solution: defining the relevant “markets” to be as small as a single customer. The general idea is that since the software products are highly tailored to a particular customer, then the bidding for an individual customer becomes its own marketplace. And, of course, in many cases PeopleSoft and Oracle are among the two or three finalists, making the “dominant” players in these micro-markets. The details of the staff argument are not public yet, but it potentially represents a major, and disturbing, expansion of merger law.

But however innovative the market, it is hard to see real-life competition in this dynamic industry being threatened by the purchase of PeopleSoft. Not only are there plenty of companies offering enterprise software, but the business of selling software is itself being challenged by innovative alternatives. Companies such as salesforce.com, for instance, are providing businesses with on-line services instead of software. Other companies simply provide the services on an outsource basis.

And there s an elephant-in-the-living-room that has been overlooked so far: Microsoft, which has announced plans to pour billions into enterprise application software. Yes, customers may witness a head-to-head battle between Bill Gates and Larry Ellison. The competition, of course, promises to be intense.

Nevertheless, antitrust regulators may still stop the PeopleSoft acquisition. One is tempted not to feel too sorry for Oracle, as it was the first to set the hounds loose. Yet the real losers would be consumers, who would enjoy a slightly less efficient, slightly less vibrant, software industry.

James Gattuso is a research fellow in regulatory policy at the Heritage Foundation.

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