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Promises to PeopleSoft's Customers Complicate Oracle's Integration Efforts
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 earned sizeable profit margins on its software maintenance contracts, under which customers pay for product updates, fixing software errors, and other forms of product support. Maintenance fees represented an annuity stream that could 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 over the next 18 months.
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's software, which PeopleSoft had acquired in 2003. Oracle committed itself to support the acquired products even longer than PeopleSoft's guarantees would have required. Consequently, Oracle had to maintain programs that run with database software sold by rivals such as IBM. Oracle also had to retain the bulk of PeopleSoft's engineering staff and sales and customer support teams.
Among the biggest beneficiaries of the protracted takeover battle was German software giant SAP. SAP was successful in winning customers uncomfortable about dealing with either Oracle or PeopleSoft. SAP claimed that its worldwide market share had grown from 51 percent in mid-2003 to 56 percent by late 2004. SAP took advantage of the highly public hostile takeover by using sales representatives, email, 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.
-Explain why Oracle's willingness to pay such a high premium for PeopleSoft and its willingness to change its position on supporting PeopleSoft products and retaining the firm's employees may have had a negative impact on Oracle shareholders. Be specific.
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