PeopleSoft, a maker of human resource and database software, announced on February 9, 2004 that an increased bid by Oracle, a maker of database software, of $26 per share made directly to the shareholders was inadequate. PeopleSofts board and management rejected the bid even though it represented a 33% increase over Oracles previous offer of $19.50 per share. The PeopleSoft board urged its shareholders to reject the bid in a mailing of its own to its shareholders. If successful, the takeover would be valued at $9.4 billion. After an initial jump to $23.72 a share, PeopleSoft shares had eased to $22.70 a share, well below Oracles sweetened offer.

The rejection prolonged a highly contentious and public eight-month takeover battle that has pitted the two firms against each other. PeopleSoft was quick to rebuke publicly Oracles original written offer made behind the scenes to PeopleSofts management that included a requirement that PeopleSoft respond immediately. At about the same time, Oracle filed its intentions with respect to PeopleSoft with the SEC when its ownership of PeopleSoft stock rose above 5%. Since then, Oracle proposed replacing five of PeopleSofts board members with its own nominees at the PeopleSoft annual meeting to be held on March 25, 2004, in addition to increasing the offer price. This meeting was held about two months earlier than its normally scheduled annual meetings. By moving up the schedule for the meeting, investors had less time to buy PeopleSoft shares in order to be able to vote at the meeting, where the two companies will present rival slates for the PeopleSoft board. Oracle seeks to gain a majority on the PeopleSoft board in order to lift the companys unique customer assurance anti-takeover defense. PeopleSoft advised its shareholders to vote no on the slate of potential board members proposed by Oracle. PeopleSoft also announced that it would buyback another $200 million of its shares, following the $350 million buyback program completed last year.

Oracle has said that it will take $9.8 billion (including transaction fees) to complete the deal. The cost of acquiring PeopleSoft could escalate under PeopleSofts unusual customer assurance program in which its customers have been offered money-back guarantees if an acquirer reduces its support of PeopleSoft products. Oracle repeated its intention to continue support for PeopleSoft customers and products. The potential liability under the program increased to $1.55 billion. In addition, Oracle will have to pay PeopleSofts CEO Craig Conway a substantial multiple of his current annual salary if he loses his job after a takeover. This could cost Oracle an additional $25 to $30 million. Meanwhile, the Federal Trade Commission is reviewing the proposed acquisition of PeopleSoft by Oracle and has expressed concern that it will leave to reduced competition in the software industry.

Questions:

1. Explain why PeopleSofts management may have rejected Oracles improved offer of $26 per share and why this rejection might have been in the best interests of the PeopleSoft shareholders? What may have PeopleSofts management been expecting to happen (Hint: Consider the various post-offer antitakeover defenses that could be put in place)?
2. Identify at least one takeover tactic being employed by Oracle in its attempt to acquire PeopleSoft. Explain how this takeover tactic(s) works.
3. Identify at least one takeover defense or tactic that is in place or is being employed by PeopleSoft. Explain how this defense or tactic is intended to discourage Oracle in its takeover effort.
4. After initially jumping, PeopleSofts share price dropped to about $22 per share, well below Oracles sweetened offer. What does this tell you about investors expectations about the deal? Why do you believe investors felt the way they did? Be specific.