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U.S. District Judge Vaughn Walker will hear two strikingly different stories Monday when the Department of Justice and Oracle Corp. kick off a trial over the technology company’s $7.7 billion hostile tender for PeopleSoft Inc. To the government, sophisticated business enterprise software is no different than baby food when it comes to determining if the deal violates the nation’s antitrust laws. Oracle-PeopleSoft would leave Germany’s SAP AG as the only other major provider of enterprise software to large companies. That would weaken competition by allowing Oracle to profitably raise prices after the merger. Oracle has countered that the government’s case is not based on a concrete definition of the enterprise software market. Rather, the Justice Department arbitrarily excludes other product options, the company has contended. The government also has abandoned one of its original arguments for stopping the deal, which calls into question whether it even has a valid case. Reconciling these two perspectives will be a challenge for Walker, a 14-year veteran of the bench. The differences separating the government and Oracle appear far greater than in the typical merger challenge. Pretrial briefs filed this week show the parties agree on almost nothing when it comes to how to define the market or how the industry works. Often, parties involved in antitrust disputes focus the case on a narrow issue. For instance, the government’s challenge to the recent First Data Corp.-Concord EFS Inc. deal centered on market concentration in the debit processing sector. In this case, there is no agreement. Both sides have starkly contrasting views of the world. The DOJ said testimony from Oracle executives and documents obtained from the technology company will prove the merger is anti-competitive. Even before it unveiled the PeopleSoft deal, Oracle touted that it competed in a high-end enterprise software market, known as EAS, consisting of those two companies and SAP. “Based on the structure of this industry alone — that is, a reduction from three firms to two for most customers — the plaintiffs are presumptively entitled to injunctive relief,” the government argued. “Indeed, no court has allowed such a merger absent a strong argument that one of the companies is failing.” The DOJ has said customers often seek bids from all three companies. They then select the two companies that have the best products and prices. These two companies then bid against each other for the contract. By eliminating PeopleSoft, Oracle no longer would have to compete on price for the right to make it into the final round of bidding. “The customer, instead of paying the price that just outbids the second-best bidder, will now be forced to pay the price that just outbids the third-best bidder,” the government said. The federal appeals court in Washington concluded that a similar arrangement in the 2000 challenge to H.J. Heinz Co.’s acquisition of Beech-Nut Nutrition Corp. violated antitrust law. In that deal, Heinz wanted to acquire Beech-Nut so it could more effectively compete against Gerber AG in baby food sales. The court concluded the merger was illegal because competition between Heinz and Beech-Nut to gain shelf space, and thus to compete against Gerber, resulted in lower prices. The DOJ antitrust division told the court that it has proof that the presence of PeopleSoft in these three-way pricing fights has resulted in lower prices. “The merger would relieve Oracle of its most significant and frequent competitive threat, allowing Oracle to profitably scale back discounting,” the government said. New enterprise software vendors are unlikely to enter the market for two years, the maximum time permitted for new entry to be relevant in a merger analysis. The government said it is too difficult for midtier players, such as Lawson Software Inc., to move into the high-end market, where the software is designed to be customized to meet business needs. It noted that J.D. Edwards & Co., then the leading midtier enterprise software company, abandoned efforts to move upstream in 2001 because the technical barriers were too formidable to overcome despite hundreds of millions of dollars in capital investments. Microsoft Corp. also is not poised to enter the high-end market because its products lack many of the functions the most sophisticated companies require. Microsoft does not even use its products for its own enterprise software needs, opting for an SAP system instead, the government said. Outsourcers also are not part of the market because they use Oracle, PeopleSoft and SAP software. That indicates that outsourcing would not mitigate a price increase, the government said. Against what appears on paper to be such a strong case, most companies would have abandoned the hostile tender months ago. Not Oracle. The Redwood Shores, Calif., company has launched an aggressive counterattack that paints a very different picture about how the industry operates. It has argued that the government is improperly defining the market, incorrectly describing how competition functions and employing an untested legal theory to justify its prosecution of Oracle. Oracle argued that the market for enterprise software is dynamic, with new providers entering the sector and competing products emerging. “New paths to the same ends are being invested all the time, and it would be a grave error to ignore them in considering the prospective effects of a merger on competition,” Oracle said. That’s why the market includes far more competitors than only Oracle, PeopleSoft and SAP, it said. The law requires that all reasonable substitutes be included in the market, Oracle said. That encompasses other software vendors, legacy systems already installed at companies, best-of-breed systems that link software from multiple vendors and outsourcing. “The end result of this gerrymandering process is a market with no discernable boundaries — the ultimate ‘know it when you see it’ market,” Oracle said. “Such a market fails as a matter of law, mandating judgment for the defendant.” Even if the government can justify such a narrow market, it mischaracterizes how competition occurs, Oracle maintained. SAP is a potent foe, and it could thwart any effort by Oracle to raise prices. That is why it is irrelevant if some companies identify Oracle and PeopleSoft as their top two choices. “A merger is unlawful only if it is likely to affect competition adversely in a line of commerce, not merely across a scattering of customers connected only by their fondness for the merging firms,” it said. Oracle also attacked the government for relying on the so-called unilateral effects theory of competitive harm, which it said has not been endorsed either by the Supreme Court or a federal appeals court. Unilateral effects holds that a merger of a company and its closest competitor can be anti-competitive if the combined company could profitably raise prices by a small but significant amount. Antitrust enforcers used it extensively during the Clinton administration and the antitrust division and Federal Trade Commission in the Bush administration have often employed the tool. Yet because few merger challenges are litigated, let alone appealed, there is little appellate court guidance on how to employ the theory. Oracle said that even if unilateral effects is a valid theory, it would not apply here because the combined company would have too small a share of the enterprise software market to make a price increase stick. “This acquisition will result in a stronger competitor to SAP and a stronger competitor in the broad enterprise software stack to the behemoths of this industry, IBM [Corp.] and Microsoft,” Oracle said. “It will also result in multibillion-dollar efficiencies that will benefit all EAS buyers of all sizes and types. These pro-competitive effects ought not be sacrificed to speculative concerns that huge corporations more than capable of fending for themselves will get hurt.” The trial is expected to conclude by the end of the month. Witnesses the parties have listed include Oracle chief Larry Ellison, PeopleSoft chairman Craig Conway and executives from companies that use enterprise software systems. The judge could rule as early as next month. Oracle launched its hostile tender in June 2003. The government sued in February to block the merger. PeopleSoft’s board has repeatedly rejected Oracle’s offer, which the latter had raised to a high of $26 per share. Oracle recently cut the bid to $21 per share. Copyright �2004 TDD, LLC. All rights reserved.

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