Promises to PeopleSoft’s Customers Complicate Oracle’s
When Oracle first announced its bid for PeopleSoft in
mid-2003, the firm indicated that it planned to stop selling PeopleSoft’s
existing software programs and halt any additions to its product lines. This
would result in the termination of much of PeopleSoft’s engineering, sales, and
support staff. Oracle indicated that it was more interested in PeopleSoft’s
customer list than its technology. PeopleSoft commands sizeable profit margins
on its software maintenance contracts, under which customers pay for product
updates, fixes for software errors, and other forms of product support.
Maintenance fees represent an annuity stream that can improve profitability
even when new product sales are listless. However, PeopleSoft’s customers
worried that they would have to go through the costly and time-consuming
process of switching software. To win customer support for the merger and to
avoid triggering $2 billion in guarantees PeopleSoft had offered its customers
in the event Oracle failed to support its products, Oracle had to change
dramatically its position. One day after reaching agreement with the PeopleSoft
board, Oracle announced it would release a new version of PeopleSoft’s products
and would develop another version of J.D. Edwards’ software, which PeopleSoft
had acquired in 2003. Oracle has committed to support the acquired products
even longer than PeopleSoft’s guarantees would have. Consequently, Oracle has
to maintain programs that run with database software sold by rivals such as
IBM. Oracle also must retain the bulk of PeopleSoft’s engineering staff and
sales and customer support teams.
Among the biggest beneficiaries of the protracted takeover
battle has been German software giant SAP. SAP has been successful in winning
customers uncomfortable about dealing with either Oracle or PeopleSoft. SAP
claimed that its worldwide market share has grown from 51% in mid-2003 to 56%
by late 2004. SAP had taken advantage of the highly public hostile takeover by
using sales representatives, e-mail, and an international print advertising
campaign to target PeopleSoft customers. The firm touted its reputation for
maintaining the highest quality of support and service for its products.
Case Study Discussion Questions
1. How might the commitments Oracle made to PeopleSoft’s
customers affect its ability to realize anticipated synergies? Be specific.
2. Explain why Oracle’s willingness to change its position
on supporting PeopleSoft products and retaining the firm’s employees may
negatively impact Oracle shareholders? Be specific.