Larry Ellison Savors His Victory
Oracle’s CEO talks about bagging PeopleSoft and why his outfit is “the application company that gets paid twice”
After an 18-month struggle, Oracle’s (ORCL ) hostile takeover gambit for PeopleSoft ended softly late on Dec. 12, when both companies reached a merger settlement. Oracle agreed to buy PeopleSoft for $26.50 a share, or $10.3 billion. The combo will create the second-largest corporate application-software maker in the world — after Germany’s SAP (SAP ) (see BW Online, 12/13/04, “Finally, Oracle Nails PeopleSoft”).
BusinessWeek Senior Writer Steve Hamm met with Oracle Chief Executive Larry Ellison at the outfit’s New York City offices the morning after the deal was completed, and just hours after it was announced. Here are edited excerpts of their conversation:
Q: Why this breakthrough?
A: The upcoming litigation in Delaware was the catalyst [Oracle took PeopleSoft to court in a bid to dislodge a poison-pill provision proffered by PeopleSoft’s board]. The experts said there was no chance the judge would pull the pill. But those same experts [earlier had declared] there was no chance a hostile takeover would work, and there was no chance we could beat the Justice Dept. [Justice’s efforts to block the merger were rejected earlier this year by a federal judge.]
Conventional wisdom has been consistently wrong on this deal. [PeopleSoft] shareholders voted — over 60% of them — to sell the company. The combination of that and the upcoming trial put the board in an awkward position. There was a lot of discomfort. They floated the number $26.50 to us through back channels. We entered into a negotiation, this time with real information about their business.
What was especially striking to us was that their maintenance business was larger and more profitable than we had thought. We can do a highly accretive deal, even at $26.50…. We think it’s a new world. Hostile takeovers can work. In fact, this one did.
Q: What does the deal do for Oracle?
A: It doubles the number of applications customers we have: It’s twice as many customers to sell to. We’re [now] increasing our applications sales force by 50%. We’re now the No. 1 application company in the U.S. — the largest market. We’re No. 1 in banking, health care, education, government. There are a number of markets where we’re ahead of SAP. We’re a very strong competitor.
In addition, we can invest more in developing applications, putting more dollars in making our products better and more competitive. That’s necessary when competing with a company the size of SAP. We have to have some markets where we’re the clear leader and most of the customers come to us. We have to have enough size to have economies of scale in engineering and support, and I think we’re there.
Q: It also helps your database software [sales]?
A: Absolutely. We’re the application company that gets paid twice. We sell application, middleware, and database. Keep in mind, the majority of PeopleSoft customers are already on the Oracle database. But still this gives us more opportunity.
Q: And this helps you against IBM (IBM ) in the database competition and against Microsoft, right? It helps to block Microsoft from the enterprise market, doesn’t it?
A: We’re a much bigger enterprise company than they are. The larger we get, the better level of support we can provide, and the better economies of scale we get. Bigger is better in software. We can increase our investment in engineering, lower our prices.
As we get bigger, the more partners want to work with us. I think IBM Global Services wants to work with us. They won’t say “we only work with SAP.” We have a chance to improve our relationships with IBM Global Services, Accenture (ACN ), and EDS (EDS ). These companies influence buying decisions.
Scale is crucial in this business. We see it in our database business, and in Microsoft Windows and desktop applications. Those are the three most profitable software products on Planet Earth. Why? People buy a lot of it.
Q: How do you see Microsoft emerging as a competitor?
A: They’re going to come at us from the bottom up. They’ll be very aggressive, and they have a lot of endurance. The name of the game when you’re entering a software market is endurance. It takes a lot of time to get it right. We’re going after their Exchange business with our Collaboration Suite. It takes several releases before you get the product right, and then you have to get your early adopters up and running. It takes a long time to enter a market where there’s a strong provider.
We have the financial clout and the technical talent to stick it out. Microsoft clearly does as well. They’ll be around. They’ll be successful in the applications business.
Q: Does this deal reshape the enterprise technology business?
A: When No. 2 buys No. 4 it does reshape it. It kicks off this consolidation phase in Silicon Valley. There are lots of sellers and not many buyers. We think we’re the primary consolidator in the enterprise software space.
Q: So there will be more deals?
A: Absolutely. There won’t be more for at least a year. We have two key constituencies we have to prove something to. We have to prove to the PeopleSoft customers that they’re better off now. We’ll do it with a higher quality of services and enhancements to PeopleSoft products. At the same time, we have our own shareholders we have to satisfy. We have to execute well over the next 12 months. Maybe I’ll come back to New York next Christmas.
Q: You’re enhancing PeopleSoft and JDE products? You say you’re going to over support these products? That’s a lot of investment.
A: Sure, it’s a lot of investment. But it’s in the right area. It’s improving products. We’re not going to increase marketing, or general and administrative expenses. Those numbers will be flat. We think the model works extremely well.