A Deeper Probe of Oracle's Agenda


The U.S. government, it seems, has a bit more digging left to do on Oracle's planned $5.9 billion purchase of Siebel Systems. Late on Oct. 24, Siebel (SEBL) disclosed that the Justice Dept. asked for more data on the proposed takeover. Siebel got what's known as a "request for additional information," which gives Justice officials more time to kick the tires on the deal and figure out whether it poses a threat to competition.

Oracle (ORCL) observers weren't surprised. It's a big deal, and the swiftly changing business software landscape isn't easy to navigate (see BW Online, 9/12/05, "Now, Oracle May Finally Rest"). Plus, it's the second big acquisition by Oracle since its controversial purchase of PeopleSoft closed in January. U.S. antitrust officials tried in vain to block that transaction. Oracle's spending spree has totaled some $19 billion so far. And while another big purchase may not be on the horizon, Oracle probably isn't done gobbling up smaller players.

That said, few expect a repeat of the battle that played out between the Justice Dept. and Oracle over PeopleSoft. The U.S. decision to bar the deal was overturned by a district court and the takeover went through. The Justice Dept. had tried to make the case that the transaction would lessen competition in the market for so-called enterprise resource management software (ERM), which runs everything from a company's payroll to accounting. Letting Oracle buy PeopleSoft would leave two main providers of ERM software: Oracle and Germany's SAP (SAP).

WILD CARDS. There was a compelling argument to be made. SAP commanded 37% of the market, and Oracle's 10% stake would grow to 15% with PeopleSoft. That would put more than 50% of the market in the hands of two players, according to AMR Research.

But ultimately, the courts ruled there were too many wild cards. Business software is a fast-changing market. And serious inroads could be made by the likes of Microsoft (MSFT) and smaller upstarts. Besides, there would still be a handful of second-tier players, such as Lawson Software, that would continue to vie with Oracle for certain customers.

The Justice Dept. will have a hard time making a similar objection to the Siebel deal. Unlike PeopleSoft, which concentrated on a range of business-software applications, Siebel is focused on a single software niche: customer relationship management, or CRM. This software helps a company's call centers and sales teams manage leads and customer support. It's an important market, valued at about $11 billion a year. But before buying Siebel, Oracle hadn't managed to get much of a foothold in CRM.

OPEN MARKET. Even after acquiring PeopleSoft, Oracle's CRM share is just 3%, says AMR. SAP has 15%: commanding, but hardly dominant. Siebel ranks No. 2, with 12%. Adding that to Oracle's puny slice doesn't change market dynamics much, says Peter Coleman of San Francisco investment bank ThinkEquity Partners. "Oracle's CRM business was going nowhere," Coleman says. "The consolidation of Oracle and Siebel doesn't dramatically change the landscape." Heather Bellini of UBS Securities concurs, saying in a research note that she expects the deal to close in early 2006.

Bolstering Oracle's case for a government green light, there's greater scope for competition in CRM than in ERP and other areas of software. Upstarts Salesforce.com (CRM) and RightNow Technologies (RNOW) are growing at a fast clip, thanks to a strategy of selling applications more cheaply over the Web for a monthly fee.

And even smaller companies, such as SugarCRM, offer similar applications written in open-source code for free download. "There are more competitors in CRM, and Salesforce.com is probably going to be their biggest argument," says Lee Geishecker, research vice-president at researcher Gartner.

CUSTOMER SATISFACTION? One area that might invite closer scrutiny is the so-called "software stack," which refers to the combo of infrastructure software such as databases and the applications that run on top of them. The bigger Oracle gets in applications, the more it can force customers to buy not only its databases but also its software -- to the detriment of companies like BEA Systems (BEAS) and IBM (IBM). Still, such software stacks aren't unusual. Both Microsoft (MSFT) and SAP have similar pieces that work together.

It's understandable that the Justice Dept. would keep a close eye on Oracle. Business software is consolidating quickly, and no one wants to see the emergence of another Microsoft. But the big question here isn't just market share but whether the deal makes things worse for customers.

In the case of the unwelcome bid for PeopleSoft, customers feared Oracle would kill the products they had invested millions in. Yet Siebel customers don't appear to be up in arms, maybe because Siebel's superior technology is likely to prevail when Oracle rolls its recent purchases into one big suite of applications (see BW Online, 10/21/05 "Oracle's $19 Billion Gamble"). "[Siebel's customers] are probably glad the software is in the hands of a financially stronger company," Coleman says.

BATTLE SELECTION. And there's no evidence that fewer providers will result in higher prices -- in fact, many industry watchers expect overall costs to drop. Some of the biggest costs associated with buying business software stem from the pricey consultants who work for months to get software from different vendors to work in sync. The more companies can buy from a single supplier, the lower the costs of integration.

Of course, no deal of this size is done until the government says it's done -- or its attempts to block a transaction founder. But if Uncle Sam wants to wage an antitrust battle against Oracle, it may need a better case in point than the Siebel deal.

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