The battle between Oracle Corp. and Pleasanton-based PeopleSoft Inc. became the most publicized Silicon Valley drama since Hewlett-Packard Corp.'s merger with Compaq Corp., and the behind-the-scenes fight proved in some ways even more intense.

As the takeover attempt nears its first anniversary, the two companies have sparred both in public and in private in a corporate drama that had -- and still could have -- tremendous ramifications for the workers of PeopleSoft and the East Bay's tech community.

Oracle Corp.'s first salvo went largely unnoticed.

On the eve of its bid to snatch control of its rival, PeopleSoft Inc., it bought a single share of the Pleasanton software maker's stock for $15.11.

The calculated move set in motion the pursuit that has hounded PeopleSoft for a year. It would threaten the very livelihood of PeopleSoft, one of the East Bay's largest employers with 3,500 workers in its Pleasanton headquarters and more than 8,000 worldwide. It would come just days after PeopleSoft embarked on a bold plan to acquire J.D. Edwards & Co. and become the world's second largest business software company, behind Germany's SAP and, for the first time, ahead of Oracle. And it would unfold as one of the most dramatic and intense battles in the high-tech industry's history.

Early the next morning, on June 6, Oracle launched its assault. The Redwood City-based high-tech giant faxed a letter to PeopleSoft, saying it wanted to buy the company for $5.1 billion, or $16 per share.

As it was 4:20 a.m. on the West Coast, no one was in PeopleSoft's offices to receive it. PeopleSoft CEO Craig Conway, having just wrapped up a customer meeting, was in the back seat of a car in Holland. J.D. Edwards CEO Bob Dutkowsky was having a father-son breakfast in Boston before a round of golf on the morning of his son's high school graduation.

"You've got to be kidding me," he said as he ran up to the television monitor to get a closer look.

The bid came as such a surprise that both PeopleSoft and J.D. Edwards thought at first it was a joke.

But Oracle, led by its larger-than-life CEO Larry Ellison, was serious. Ever since Conway, a former Oracle protege, first broached buying a division of Oracle in a brief conversation a year ago, Oracle had been eyeing PeopleSoft. Inside Oracle, company strategists had dubbed PeopleSoft with the code name "Pepper Software" and J.D. Edwards as "Jalapeño."

When "Pepper Software" announced that it intended to acquire "Jalapeño," Oracle set its plan of attack in motion. It secured $5 billion from investment bankers Credit Suisse First Boston to fund the purchase. It drew up talking points to guide its executives in talking about the deal to the media and industry analysts. And Oracle, which created a subsidiary called "Pepper Acquisition Corp.," bought the single share of PeopleSoft so it would receive all of PeopleSoft's shareholder communications.

On that Friday morning in June, Ellison and Jeff Henley, then the chief financial officer and now chairman of Oracle, took the hostile takeover bid to Wall Street.

"(PeopleSoft's) stock price has been sinking and now they have proposed what we think the shareholders have viewed as a very risky merger with J.D. Edwards," Ellison said.

Ellison said he had a better, less risky plan: Retain the top PeopleSoft developers and support staff and move them to Oracle's team. Stop selling PeopleSoft's products to new customers, but continue to maintain PeopleSoft's existing line. Then eventually shift those customers to Oracle's software.

"We're not trying to sort of keep both of these businesses alive and somehow try to make them work together," Ellison said. "Ours is an acquisition of consolidation."

Confident of Oracle's strategy, Ellison and Henley predicted that it would wrap up by July. They seemed to underestimate PeopleSoft's ability to resist.

Conway fired back that day, calling the bid "atrociously bad behavior from a company with a history of atrociously bad behavior."

Conway and Ellison were not strangers. Conway had been a rising sales executive at Oracle before he was forced out.

Conway went on to lead startup TGV Software Inc., which he sold in 1996 to Cisco Systems for $115 million. Conway then landed at PeopleSoft, which had helped build the Tri-Valley into a high-tech hub. The company had prospered by selling programs to help corporations handle such tasks as payroll and human resources.

Co-founder Dave Duffield set the tone for the company: one in which employees enjoyed free bagels, started a company rock band and traveled to Lake Tahoe on Duffield's dime. PeopleSoft couched itself as "people soft," in contrast to the ruthlessness and hyper-competitiveness of Oracle.

But PeopleSoft, ravaged by software bugs, uncontrolled spending and a sales lull because of Y2K fears, was in disarray when Conway, tapped by Duffield, joined in 1999. Conway swooped in -- with an Oracle-like hand, critics said -- and set up a strict structure to monitor everything from corporate spending, employee performance and the number of software bugs produced.

The changes, such as eliminating the free bagels that were costing the company $2 million a year, alienated some employees, but they helped PeopleSoft recover.

It was in this swift, calculated and intense manner that Conway and his team of hand-picked executives tackled the company's toughest challenge ever.

From Europe, Conway began orchestrating the company's defense against Oracle. He left a message with Dutkowsky, making sure the J.D. Edwards merger was still on. As he has often done in the past, he recorded a voice mail for PeopleSoft's employees. "It should go without saying that there is no possibility that PeopleSoft would consider selling the company to Oracle," he said.

In the Bay Area, Nanci Caldwell, PeopleSoft's chief marketing officer, and Kevin Parker, the chief financial officer, took their posts. Jarred awake at 5:45 a.m., they assembled a core group of attorneys, bankers, a public relations consultant and a communications team. Within minutes, they got on a conference call and started a five-hour lesson on the ins and outs of hostile takeovers.

Up until then, Caldwell said, her knowledge of hostile takeovers had come from the TV show "Dallas." "How long does the evaluation take?" she asked. "When do we start communicating?"

By Sunday of that weekend, two days after Oracle's takeover bid, the PeopleSoft board had met and given Conway the green light to approach J.D. Edwards about revising the deal. The two companies spent the next week hammering out a contract that would allow the merger to close more quickly. It unveiled the new agreement less than two weeks later, lobbing an obstacle in Oracle's way.

PeopleSoft's Pleasanton offices turned into the front lines. Command central was a room in the headquarters' main building called "The Good, the Bad and the Ugly," named like the other rooms on the floor after a classic Western. The group ordered a stream of take-out, a revolving menu of In 'N' Out burgers and fries, chicken tikka masala and pad thai.

Caldwell hosted a conference call every morning at 8:15, nicknamed the "Breakfast Club," followed by another one at 3 p.m. They discussed the day's media coverage and plotted strategy.

"We were aggressive at anticipating every move," said Kara Wilson, group vice president of corporate communications. "We were constantly thinking about what Oracle's next move was, and trying to outflank them."

Each time Oracle did make a move, the same group mobilized within minutes, tapping into a conference call to decide how to respond, said Steve Swasey, the director of corporate public relations.

With Oracle dominating the airwaves, PeopleSoft also knew it had to get its message out. It started sending daily e-mails to employees, which contained news links and, to boost employee morale, a humorous anecdote: a story, for instance, of a stranger buying an employee a drink after learning he worked at PeopleSoft.

After some industry analysts distributed incorrect information, PeopleSoft arranged briefings between the analysts and its bankers and lawyers to educate them on the hostile takeover process. "That was guerrilla education," Caldwell said.

It kept in touch with customers through an internal Web site, where it posted regular updates on the takeover attempt.

Caldwell scoffed at Oracle's accusation that the company intentionally fed customers' fears about the Oracle deal, rallied them to write letters to their state justice departments and drew up canned quotes to run in advertisements. "You don't speak for customers," she said. "They were speaking what they believed, not what PeopleSoft believes, or anyone else."

More than 30 state justice departments joined to investigate the deal, but they came together on their own, PeopleSoft said.

PeopleSoft's defense didn't end there. It knew that it had to prove itself when it reported its earnings for the quarter ending June 30. Oracle's bid came just as PeopleSoft's sales team was closing deals, and now it appeared that some customers might freeze.

Conway empowered the company's executives: "Let me deal with (Oracle)," Joe Davis, a former company executive and now the CEO of Coremetrics, recalled Conway saying. "Oracle is my issue and the board's issue to deal with. You should focus on (combining) PeopleSoft and J.D. Edwards and devote as little energy as you can to what's going to happen with Oracle."

"That's what we did," Davis said.

PeopleSoft also created a "customer assurance program," or CAP. The program guarantees customers that they'll receive up to five times their money back if Oracle takes control of PeopleSoft and dismantles its products.

PeopleSoft employees also jumped into action. About a dozen formed an independent group called "Power to the People." They spent their lunch hour hitting businesses on Pleasanton's Main Street to place "We Support PeopleSoft" posters in the windows. They tied blue ribbons to the campus' trees. They designed pins -- a red slash through "Oracle" -- and T-shirts -- "Larry, Kiss Our Apps!" -- and sold them, using the profits to fund a "Power to the People" Web site, www.pttp.org. The site received hundreds of e-mails of support from as far as Australia and France, said Jason Blessing, vice president of consulting and one of the founders of the group.

One "Power to the People" member, Tom Schmidt, even batted out a screenplay, which he prefaced with "Any resemblance to corporations or persons living, dead or undead is purely coincidental, but hopefully annoying."

In his version of the takeover bid, the "Dark Lord" rules over "Evil Empire Inc." and is inspired to take PeopleSoft by force because his own software applications aren't up to snuff.

"I have felt a disturbance in the market force," the Dark Lord says. "Why are our applications not dominating the earth as I had planned?"

Schmidt, who also rewrote the lyrics of "Louie, Louie" as "Larry, Larry" (an excerpt: "You're cold, you're rude, your methods are crude"), turned around the story in less than half an hour soon after Oracle launched the bid.

"There was just such a general outrage," said Schmidt, a product manager at PeopleSoft. "When you feel threatened, it generates a lot of energy and you need a place for that energy to go."

Oracle, however, would be a much more formidable and steadfast foe than the Dark Lord.

By the end of the day of its announcement, Oracle appeared to hold the upper hand.

"We've certainly wounded (PeopleSoft,)" said Peggy O'Neill, vice president of analyst relations in an e-mail after reviewing the day's media coverage. "Our launching this hostile takeover attempt really highlights (PeopleSoft's) weakness to the whole market. Even if we don't end up closing the deal, this is going to take (PeopleSoft) time to recover."

"And of course, our corporate image of being aggressive, brash and marching to the tune of a different drummer has been reinforced. I dunno about you guys, but today I was very proud to be an Oracle employee!"

Many on Wall Street speculated that Oracle would get what it wanted.

Some industry analysts warned clients to hold off on buying PeopleSoft's software. Oracle forwarded the reports to PeopleSoft customers.

Los Angeles County, which had been looking into a $100 million software project, became one of several potential customers to halt negotiations with PeopleSoft. One Oracle sales executive reported that the bid had helped him lure a $2.5 million PeopleSoft account to Oracle.

But during the summer, the tide began to turn.

PeopleSoft's customers, outraged that they could face spending millions of dollars switching to Oracle's products, waded into action. To Wall Street's shock, PeopleSoft's profits didn't slip, a sign that customers were still buying PeopleSoft's products.

Oracle realized that it had to woo PeopleSoft customers more aggressively. It held two "Town Hall" meetings, allowing them to call and write in with questions. It posted advertisements in newspapers and mailed thousands of letters at $18 a piece.

Chuck Phillips, a former Morgan Stanley analyst and now a top Oracle executive, responded to customer queries. "We at Oracle received your e-mail and understand your concern," he wrote. "Should we acquire PeopleSoft, you have no need to feel pressure to migrate to Oracle applications."

Oracle also heeded criticism from stockholders, who had become increasingly hostile.

Skeptical of whether Oracle was serious about the deal, they questioned how Oracle was going to overcome PeopleSoft's anti-takeover measures. And if Oracle really expected to close the deal, why did it seem like Oracle was low-balling the bid?

"You're illustrating exactly why a lot of people don't like your company; why no one takes this offer seriously," said one stockholder on a conference call.

Oracle heard the message. Two weeks after its initial bid, it raised its offer price from $16 per share to $19.50 per share, increasing the deal's price to $6.3 billion.

Oracle was far from defeated. It sued PeopleSoft to get rid of its poison pill. It also vowed to seize control of PeopleSoft's board -- and thus the company -- at PeopleSoft's annual shareholder meeting.

"We have a few things up our sleeve," said Phillips in September. "Time is on our side."

Only one factor, Ellison said, could stop Oracle: antitrust.

All mergers must pass Justice Department muster before they can be completed. Most businesses file the paperwork and receive approval within a few weeks. PeopleSoft and J.D. Edwards did just that, getting the thumbs up in mid-July.

It was not so easy for Oracle. After an initial review, the Department of Justice said in late June that it would launch an investigation. Oracle took the news in stride, noting that such a hefty deal naturally draws antitrust regulators' attention.

But the Justice Department's investigation put the head-to-head battle on hold.

In September, Ellison predicted the investigation would end by late October. November passed, then December. Conway accused Oracle of stalling. Oracle accused PeopleSoft of lobbying the Justice Department.

The issue came down to the definition of the business software market and how it would be affected if PeopleSoft were swallowed up.

PeopleSoft insisted that only three companies -- SAP, Oracle and PeopleSoft -- were capable of serving high-end customers such as the Internal Revenue Service and Charles Schwab & Co. Inc. Without it, the market would shrink to two, raising prices and limiting choice, PeopleSoft contended.

Oracle, on the other hand, argued that the market would stay competitive, with other software makers stepping in. Most important, Microsoft Corp. was looking to move into this market, Oracle said.

The decision rested in the Justice Department's hands. If Oracle won antitrust approval, it felt confident that PeopleSoft's roadblocks would become no more than speed bumps.

By the end of summer, PeopleSoft was sprinting to complete its deal for J.D. Edwards.

But, at the same time, PeopleSoft knew that the war against Oracle hadn't ended. In November, it quietly shifted the deadline for shareholders, such as Oracle, to submit proposals for its annual shareholder meeting, including nominations to its board of directors.

The move forced Oracle to reveal some of its tricks. This was its one opportunity for the entire year to seize control of PeopleSoft's board, and now it had to act sooner than it expected.

Its strategy was to demand that PeopleSoft put its newest board member, Michael Maples, up for re-election. Maples had been appointed as part of the J.D. Edwards merger, so shareholders had never approved him, Oracle said. With Maples up for election, Oracle would have a chance to elect five, not four directors to PeopleSoft's board, giving it a majority. From there it could control the company and complete the merger without opposition.

To sweeten its chances, Oracle also raised its bid price from $19.50 to $26 per share, making it a $9.4 billion deal.

But just as this battle heated up, it was cut short. In late February, after more than half a year of legwork, the Justice Department sued to block the deal, shifting the battle to the courtroom, where it remains today.

The most visible signs of Oracle's hostile takeover bid have vanished in Pleasanton. The "We Support PeopleSoft Employees" posters have been taken down. The daily Oracle e-mail updates have stopped circulating. The "Breakfast Club" has stopped meeting regularly.

But the battle still lingers. It materializes whenever Parker, PeopleSoft's chief financial officer, reviews the company's ledgers: a cumulative $55 million spent on lawyers, bankers and public relations consultants in the past year.

It lives on as Oracle heads to court in June to fight the Justice Department's opposition. Even though a federal court judge is expected to render a decision in early July, the loser is expected to appeal, delaying an outcome even further.

And in November, PeopleSoft and Oracle go to court before an Alameda County jury in a case in which each side claims the other damaged its business.

Most recently, just before a PeopleSoft conference in mid-May, Oracle lowered its bid from $26 per share to $21 per share, or from $9.4 billion to $7.7 billion. It said that the new price reflected PeopleSoft's current value.

The underlying message? PeopleSoft's procrastination cost its shareholders $1.7 billion, said Ken Marlin, managing partner of investment bank Marlin & Associates in New York.

A year later, it is still difficult to determine a winner or loser. PeopleSoft has remained independent and is plowing ahead with its J.D. Edwards merger. Positive opinion of the company has gone up, according to a survey by Emeryville-based Techtel Corp., while Oracle's has gone down.

But with Oracle breathing down its neck, PeopleSoft faces more than the usual pressures to make the merger a success. Some analysts have doubts that it will be able to pull off the goals it has set for itself, which could leave an opening for Oracle.

The uncertainty also continues to cast a pall over PeopleSoft's efforts to land new software deals. Some analysts worry that a desperate PeopleSoft is rushing to sign contracts at deep discounts at the expense of future deals.

PeopleSoft isn't bowed. "Oracle's bid is less and less relevant given the antitrust situation," Parker said. "We continue to focus on our products and customers and to win in the marketplace."

Oracle, meanwhile, doesn't need a PeopleSoft acquisition to be successful, experts say. It gets to rattle its competitor just by keeping its bid alive. So why should it stop?

"I don't think Larry will ever say, 'Gosh, I was wrong. We don't find this attractive at all,'" said Igor Sill, an executive recruiter who has worked with both Ellison and Conway. "He will let it die a slow death."

Both companies have come out for the better, said Mitchell Kertzman, a partner with the venture capital firm Hummer Winblad Venture Partners.

"In many ways, both companies have proved something," he said. "I don't think people expected Oracle to be as patient and disciplined as it has. PeopleSoft has proved that it's tough. They played hardball and they've been winning. ... I don't think either company has been diminished by this process."

In Schmidt's fictional depiction, the story would end like this:

"The Dark Lord and his minions would launch their attack and just when it looked like they might succeed, the PeopleSoft customers would wade into the fray and drive the evil one back across the water to lick his wounds and plot for another day.

"In short, the good guys would win."

But, writes Schmidt, "Come to think of it, that's pretty much what has happened."

Contra Costa Times

-- Anonymous, May 31, 2004