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When the U.S. Department of Justice sued to block Oracle Corporation from acquiring PeopleSoft, Inc., it looked as if PeopleSoft had finally found its white knight. “Oracle’s takeover doomed, experts predict,” a San Francisco Chronicle headline declared. “I don’t think even Barry Bonds could win this for the defense,” David Balto, then a White & Case partner, toldThe Deal. The government filed its case on February 26, 2004, in federal district court in San Francisco, eight months after Oracle made its hostile bid. It alleged that a merger would violate section 7 of the Clayton Act, which prohibits combinations that may substantially lessen competition and lead to prices set above competitive levels. The government claimed that the merger would leave just two companies-Oracle and Germany’s SAP AG-controlling the market, and lead to higher prices, less innovation, and decreased support for customers. The Department of Justice limited the relevant market to “high-function” human resources and financial management software used by large companies with complex needs. The government’s case relied on the so-called unilateral effects doctrine, which assumes that certain mergers make it possible for competitors to raise prices without colluding. Even Oracle’s lawyers at Latham & Watkins initially had a dim view of Oracle’s chances. “It looked solid on the outside, but it was an eggshell case,” says partner Daniel Wall. Latham came on board late in the game, after Howrey Simon Arnold & White and Morrison & Foerster had spent eight months trying to convince the Justice Department to clear a merger. When Oracle sensed the government would sue, it turned to Latham partners Wall, 49, J. Thomas Rosch, 65, and Gregory Lindstrom, 51. (The firm had not worked for Oracle before.) “It was not a matter of switching firms, but making a selection of trial counsel,” says Oracle associate general counsel Dorian Daley. Wall quickly changed his mind about the government’s claims. For one thing, e-mail documents produced in discovery revealed that Microsoft Corporation was secretly considering buying the market leader, SAP. “It was one of the singular moments in my career,” Wall recalls. “My first reaction was, ‘This is over. It’s a different case. A completely different case.’ ” A Microsoft-SAP combination would create a bloodbath of competition between Bill Gates and Oracle’s Lawrence Ellison, Wall thought. Microsoft abandoned its bid by the time trial started, but Wall still presented this information as evidence that Microsoft might enter this field. The four-week bench trial began June 7 before federal district court judge Vaughn Walker. The 61-year-old judge had been an antitrust partner at San Francisco’s Pillsbury Madison & Sutro before President George Bush appointed him to the bench in 1990. Initially pegged as a conservative, he established himself as an unpredictable maverick unafraid of controversy. In a 1994 interview he argued for the legalization of drugs. In 2000 he set up an auction to decide which plaintiffs firm should be lead counsel in a securities class action (that novel practice was later struck down by the U.S. Court of Appeals for the Ninth Circuit). In another high-profile antitrust case, he allowed the San Francisco Chronicle newspaper to be acquired by The Hearst Corporation in 2002. Leading the government’s team was Renata Hesse, the chief of the networking and technology section of the Justice Department’s antitrust division, and trial lawyer Claude Scott, Jr. Thomas Barnett, who left his Covington & Burling partnership in April 2004 to join the Department of Justice as a deputy assistant attorney general, supervised. Their approach was to rely on what had been a winning formula in similar cases: define the market narrowly and present customers who would describe how the merger would hurt them. Ten PeopleSoft customers, including top executives from DaimlerChrysler AG, PepsiAmericas, Inc., and Verizon Communications Inc., took the stand and recounted their concerns that an Oracle-PeopleSoft merger would limit their choices and lead to price hikes. Latham’s Lindstrom cross-examined most of these customers. He set out to show that these allegedly vulnerable witnesses were really powerful corporations with the bargaining power to keep Oracle and SAP in check. He also pressured some to admit they could buy from smaller software vendors. Instead of countering with its own parade of customers, Latham called some of Oracle’s smaller competitors to testify about their healthy roster of clients. As the trial progressed, the Latham lawyers felt so confident that they pared their witness list. But at closing arguments the government felt heartened by some of the tough questions that Walker directed at Wall. “We thought the closing went extraordinarily well,” says Barnett. Walker’s decision, released on September 9, 2004, thoroughly rejected the government’s case. He dismissed the government’s definition of a distinct “high-function software market.” The relevant market was broader, he wrote. Most devastating to Justice (and PeopleSoft), Walker brushed aside the testimony of the government’s ten customer witnesses. These executives simply talked about their preferences, he wrote, instead of presenting economic analyses to show how a merger would affect their purchasing decisions. “Unsubstantiated customer apprehensions do not substitute for hard evidence,” he wrote. He also stated that it didn’t matter what customers said they would do; the relevant inquiry is what they could do. In other words, Walker didn’t want the messy real world, where customers sometimes act on fears and imperfect information. He viewed the case through the lens of economics. Wall says that Walker’s treatment of customer testimony wasn’t surprising. “Judges have been frustrated with customer testimony [in these cases] for a while,” he says. “It’s typically been very conclusory, fluffy testimony.” Justice’s Barnett counters that some of the government’s witnesses did testify about specific costs of switching to other providers. And the fact that some customers hadn’t analyzed the cost of changing to smaller software companies showed that they weren’t viewed as viable alternatives. “The fact that they had not done so was a statement in itself,” he says. Perhaps most problematic for the government, Walker took aim at a fundamental element of the Justice Department’s unilateral effects theory as set forth in its merger guidelines. The guidelines presume that a deal is anticompetitive if it leaves a company with 35 percent market share, and the remaining market is “differentiated” (which means that competitors’ products can’t be easily substituted for one another). Walker said that that threshold is too low, and a deal must produce a monopoly to warrant that presumption. The government had 60 days to appeal Walker’s decision. But within three weeks it had made its choice: Let the ruling stand. “The court of appeals would give [Walker's factual] findings a lot of deference,” Barnett explains. “If you accept his factual findings, it’s hard to show the merger is anticompetitive.” Barnett says this decision won’t deter the government from bringing similar cases. “We’re still looking at trying unilateral effects cases the same way,” he says. He adds that the decision is so “extraordinarily fact-based” that it shouldn’t have much precedential value in other cases with different facts. But Latham’s Wall believes that Walker’s decision will have repercussions. “It’s the first time a judge has put a substantial gloss on the merger guidelines,” he notes. PeopleSoft’s lead antitrust lawyer, Gary Reback, speculates that the government may have declined to appeal because it didn’t want to see an appellate court uphold Walker’s view of those guidelines. Barnett says that wasn’t really the reason, because he views Walker’s statements on the guidelines as dicta. Reback says that Walker’s decision and other recent antitrust court losses by the government have created uncertainty about how courts will view customer testimony. “We’ve always thought customer testimony is the trump card,” says Reback. “What does this mean?” If nothing else, it’s good news for one special group of customers: companies who want to buy their competitors. Back to Extreme Takeover

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