Eat ... Or Be Eaten

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Ellison may have some of the deepest pockets in his industry. Oracle boasts $5 billion cash on hand and $9 billion in annual revenues, and its net income increased 31% in the most recent quarter. But Ellison also faces a whole range of challenges. His biggest asset is Oracle's Database software: 70% of all packaged business applications worldwide run on it, making it as hard to ignore as Microsoft Windows. Even Oracle's biggest rival, German giant SAP, chooses to use Oracle Database over its IBM and Microsoft-made counterparts. Oracle Database is a huge part of that virtual plumbing system known as back-office software, which helps keep track of payroll, makes sure products leave warehouses on time--and remains mostly invisible to all but the client company's IT department.

Trouble is, the market for back-office systems is rapidly maturing. Most companies that need them already have them; upgrading is costly and generally happens once a decade. The big growth prospects these days are found in the front office: customer-relationship-management (CRM) software, the stuff that helps a retailer tell, for example, whether you're a customer worth pampering. As anyone who has spent hours in customer-service hell knows, these products are not as widely used as they could be: 30% of the FORTUNE 500 has no CRM software. Because it is difficult to operate, front-office software is also a gold mine for consultants. Siebel Systems, one of the larger CRM-software manufacturers, makes 66% of its revenue from consulting.

Oracle dipped its toes in the CRM market, but the results failed to impress. "They built it, and no one came," says Erin Kinikin, vice president of Forrester Research. Oracle's e-business suite, known as 11i, was plagued by early reports of bugs that turned installations into nightmares. Meanwhile, Microsoft was making inroads into the database business with its fast-growing SQL Server software. And SAP just kept getting larger. Its share of the market for enterprise applications has grown from 51% to 54% in the past year alone. By contrast, Oracle has a 15% share and PeopleSoft has 11%.

Ironically enough, it was PeopleSoft's Conway who first suggested to Ellison last year that the applications side of their businesses should merge. The discussions were cordial--hard to imagine after a week in which Conway compared Ellison to Genghis Khan--and the two companies exchanged fact-finding teams. The sticking point: who would run the joint business. "He said, 'I'm your man,'" says Ellison. "Conway didn't see a single antitrust problem then." (Conway does not dispute this account of the meeting but points out that discussions were over in a matter of hours.) After negotiations broke down, Ellison kept the idea of some kind of PeopleSoft deal in the back of his mind.

In Silicon Valley rumors abounded that Oracle was looking to buy someone out. The name mentioned most often was that of Tom Siebel, another of Ellison's estranged proteges and CEO of Siebel Systems. Siebel executive vice president David Schmaier, however, says the company is an "acquirer" as opposed to an "acquiree." (Ellison describes Siebel as "in play" but says the company is too vulnerable for him to consider purchasing it.)