The Oracle hostile takeover of PeopleSoft: causes and defenses

PeopleSoft and Oracle Merger

Why was this a hostile takeover?

PeopleSoft strongly resisted the attempts of Oracle to buy out its stock, thus making the takeover hostile rather than friendly. "When the deal [merger] is unfriendly -- that is, when the target company does not want to be purchased -- it is always regarded as an acquisition." (Investopedia, 2005) PeopleSoft feared Oracle was merely seeking to buy PeopleSoft to acquire its lucrative customer base of application software. PeopleSoft felt Oracle was interested in supporting its company products, and also that its initial bids to buy its stock were inadequate. Financial industry analysts agreed it was unlikely that Oracle would look to have PeopleSoft develop much in the way of new technology and that a sizable amount of job cuts at PeopleSoft would be likely after the merger, as this was "a financial acquisition" where PeopleSoft's employees would be the losers, or the first to go as the two firms merged their operations. (LaMonica, 2004)

What can a firm do to make takeover less likely?

Target firms in hostile takeovers tend to have the following characteristics, according to Bhide (1993) and Palepu (1991) (cited in "Discussion Issues and Derivations," 2005). Targets of mergers are usually smaller firms, with dispersed stockholdings, and a history of poor project choice and stock price performance. The target firms have under-performed in relation to their comparable competitors in terms of return on equity and stock returns, and have lower insider holdings than other firms in their peer group.

To avoid a takeover, increasing the rate of insider holdings, concentrating them in the hands of powerful investors, and improving the price and returns on investor's stocks in the short-term is thus ideal, an ideal that cannot always be realized. To suggest better project choices in the concrete terms of the industry, and also within a feasible financial strategy would also be helpful in creating investor confidence, as would an expressed willingness to conduct cost-cutting on the part of the target firm by its own volition, without having to undergo the synergy of a merger. PeopleSoft's poor performance, however, could not be remedied.

What are some of the goals of a merger?

A company usually initially experiences a brief stock boost in price and heightened optimism after a merger, as it is assumed that "two companies together are more valuable than two separate companies." (Investopedia, 2005) All mergers have one common goal, to create "synergy that makes the value of the combined companies greater than the sum of the two parts." (Investopedia, 2005) Such successful synergy of cost efficacy is not always achieved. The weaker firm if often subject to more cuts, especially if the stronger firm, as was feared in the PeopleSoft-Oracle merger, is mainly acquiring the new firm to bolster its market position in tough times or in a highly competitive industry.