U.S. Department of Justice officials announced on Thursday that they will challenge Oracle's hostile US$9.4 billion takeover bid for PeopleSoft, dealing a major blow to the controversial deal.

The Justice Department will be filing a civil antitrust lawsuit in U.S. District Court in San Francisco later Thursday to block the proposed acquisition. In reaching its decision, the agency said the combination of Oracle and PeopleSoft would hurt competition in the market for software sold to large businesses. Industry watchers had largely expected the deal to be ultimately blocked, given an earlier recommendation by the Justice Department staff to nix the bid.

The attorneys general of Hawaii, Maryland, Massachusetts, Minnesota, New York, North Dakota and Texas are joining the Department's lawsuit.

"We believe this transaction is anticompetitive--pure and simple," R. Hewitt Pate, assistant attorney general in charge of the Department's antitrust division, said in a statement. "Under any traditional merger analysis, this deal substantially lessens competition in an important market. Blocking this deal protects competition that benefits major businesses as well as government agencies that depend on competition to get the best value for taxpayers' dollars."

"The Department of Justice decision follows an aggressive lobbying campaign by PeopleSoft management," said Jim Finn, a spokesman for Redwood City, California-based Oracle. "It is inconsistent with the overwhelming evidence of intense competition in the markets we serve, and we believe it is without basis in fact or in law. A combined Oracle/PeopleSoft will significantly benefit all customers and shareholders involved."

PeopleSoft President and CEO Craig Conway said, "Now that the antitrust day of reckoning has arrived, and the Justice Department has announced its decision to sue to block the transaction, it is time for Oracle to abandon its efforts to acquire the company. Both companies should now devote all of their energy to competing in the marketplace to provide better products and services for customers. That's the PeopleSoft way of creating greater value for our stockholders."

The Justice Department's Pate said Oracle, Pleasanton, California-based PeopleSoft and one other firm, SAP, are the only companies that compete with each other to develop and sell enterprise human resource management and financial services software for large businesses and government and nonprofit organisations.

Moves and countermoves
It's been a nine-month saga for the companies, which started in June, when Oracle launched a surprise hostile bid for PeopleSoft. Oracle's takeover bid was prompted by a PeopleSoft announcement four days earlier that it planned to buy J.D. Edwards.

In previous statements, Larry Ellison, Oracle chief executive, said his company felt compelled to act quickly and that it preferred to buy only PeopleSoft--rather than the combined company.

But while Oracle had the advantage of a surprise bid, PeopleSoft responded with two important strategic moves--one designed to keep its deal with J.D. Edwards intact and the other to reduce the defection of its customers.

In order to move ahead with its acquisition plans, PeopleSoft changed the terms of its J.D. Edwards acquisition. That allowed PeopleSoft to close its deal without approval from its shareholders, who might otherwise vote against it in favor of a higher buyout bid from Oracle.

PeopleSoft also offered customers a guarantee that its products would be supported for at least a decade; otherwise, Oracle--or any other buyer--would have to refund customers two to five times their software license fee costs.

PeopleSoft was able to close the J.D. Edwards acquisition in August. And PeopleSoft, while acknowledging that some of its customers were delaying purchases or switching vendors as a result of the Oracle takeover bid, was able to post fourth-quarter revenue results that beat analysts' expectations as well increase its earnings forecast for 2004.

Meanwhile, against the backdrop of the hostile tender offer, Ellison and Craig Conway, PeopleSoft chief executive and a former Oracle executive, lobbed barbs at one another, at times with colorful imagery involving bullets and dogs.

Throughout the past nine months, Oracle's takeover bid, as well as the PeopleSoft and J.D. Edwards merger, has served as a reminder that the industry is undergoing consolidation.

Ellison himself noted during the company's annual shareholders meeting that Oracle will be in acquisition mode--with or without PeopleSoft.

"Our strategy has historically been to build products and enter new markets, as the industry matures and we become a larger and larger company. But if you really want to move the revenue dial at Oracle, we're going to have to do a combination of developing new products...(and) go into the market and buy some number of companies," Ellison said.

"If the merger doesn't go through, we will look at other acquisitions," he said. "Even if it does go through, we will probably go look at other acquisitions."

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