An In-Depth Look At Oracle
In late January, Oracle laid off between 10 percent and 15
percent of its Applications division.Â
The cuts hit all management levels, all organization groups within the apps
division, and all regions; at some groups, headcount was cut by as much as 30
percent.
The cuts in Applications were not performance based, but were undertaken to
lower that division’s operating expenses. The January round of cuts only
affected the Oracle Applications people – not “Oracle people” or “JD Edwards”
people – and rumor has it that 800 to 1,000 people were laid off. (Ironically, I
understand that the January layoffs were delayed by a week or two due to a
series of problems encountered with an upgrade to Oracle’s internal
implementation of its own human resources applications.)
A few points about Oracle’s new combined business:font-family:Arial;color:black”>
First, the PeopleSoft portion of the business will be instantly more profitable
after the merger because it’s no longer going to be selling PeopleSoft
applications. It will be taking orders from existing customers but not looking
for new customers, which makes a very big difference. Rough numbers could be at
about a 30 percent operating margin plus or minus 5 percent versus 6 percent it
could have earned in 2004. I don’t expect to hear about its fourth quarter
results – my bet is that it missed by a substantial margin.
Second, Oracle is quick to claim it has a leading share of chunks of the apps
market. That’s accurate for now, on a trailing 12-month basis. But since Oracle
is not selling more PeopleSoft apps to new customers, it’s going to lose share
in the human resources, financial services and call center software business.
SAP will likely gain at Oracle’s expense in the first two businesses, and Siebel
in the third.
The anti-trust issue in this merger lay with the application business – both ERP
(enterprise resource planning) and CRM (customer relationship management).
Removing PeopleSoft from the ERP business (particularly since it had bought J.
D. Edwards in 2003) has left SAP with a more dominant share of the business.
Taking a look at the high-end of the market, Oracle had around 35 percent to 40
percent of this market prior to the merger with PeopleSoft and it will now be
over 50 percent after the merger. There are many that will not buy the
PeopleSoft product even if Oracle swears it will continue to “support” it. Some
people will assume that Oracle will under-invest in the further development of
the application – and no one wants to invest in ERP software that is bound to
become obsolete in four to five years. Furthermore, Oracle buying PeopleSoft is
likely to mean death to the CRM portion of the business and concentrates the
call center software market squarely in the hands of Siebel. Same reason.
font-family:Arial”>the extent that Oracle could be really stupid about how it
manages the acquired business the damage would be to the competitive environment
and the existing user base of PeopleSoft and JD Edwards customers. The
competitive environment would suffer if Oracle stops selling PeopleSoft 8
because just about all of this business will go to SAP. If it stops selling JD
Edwards products (which is more likely) some JD Edwards business will go to
Oracle, but more will goes to Lawson, QAD, Epicor, and MAPICS with a minor
amount trickling to SAP. At the end of this process, at the high-end of the
business SAP will have a majority of revenues and no one will be even close —
SAP will have three or four times the nearest competitor for companies with more
than 5,000 employees. Users would have to decide at some point whether it makes
sense to stay with a legacy product with limited prospects for support, or
whether it makes sense to migrate off of PeopleSoft.
Is Oracle likely to make more acquisitions?
From BEAs perspective, however, Oracle seems like the most likely buyer. CEO
Larry Ellison himself cited BEA as a potential acquisition candidate in his
testimony during the Oracle/PeopleSoft antitrust trial. But from Oracle’s
perspective, BEA doesn’t really matter because Oracle has more than enough
customers, and the only other real complete option is IBM. (But IBM buying BEA
would seem like a waste of money.)
So what does ORCL stock
do from here?
Melanie Hollands