Eat...Or Be Eaten

• Share

In a tech industry in which news seems to trudge to the same dreary drumbeat — a relentless sales downturn, profits stagnant at best, venture capitalists with their wallets shut tight — at least Larry Ellison can still come up with a surprise. The founder of Oracle — one of the world's richest men, with company stock worth more than $17 billion — spent last week pushing a hostile bid to take over rival business-software firm PeopleSoft for a lowball price of $16 a share — about 50¢ less than the market value of the stock. Neither analysts nor competitors seemed sure whether to take him seriously. "Larry's just having some fun with these people," says Jim Goodnight, CEO of software firm SAS, based in Cary, N.C. "He's trying to mess up sales they're trying to close before the end of this quarter."

The 8,200 employees of PeopleSoft, based in Pleasanton, Calif., were not amused. CEO Craig Conway, 48, himself a former Ellison protege, had just successfully negotiated a $1.7 billion merger deal with another rival, Denver-based J.D. Edwards. That was supposed to be the big story in the software business. Then Conway's customers started talking about the Oracle offer and whether they should postpone purchases until things settled down. Even after the PeopleSoft board concluded there would be antitrust problems with an Oracle takeover, Ellison was still pressing the deal on PeopleSoft shareholders. By the end of the week, PeopleSoft and J.D. Edwards had launched lawsuits against Oracle. "I've observed his business practices before and not agreed with them," says Conway. "But this is a whole new level of Larry behavior."

LATEST COVER STORY Mind & Body Happiness Jan. 17, 2004 Past Issues Tsunami Jan. 10, 2004 ----------------- Person of the Year Jan. 3, 2004 ----------------- Secrets of the Nativity Dec. 13, 2004 ----------------- The Stealth Killer Dec. 6, 2004 ----------------- Coolest Inventions Nov. 29, 2004 ----------------- Battle for Fallujah Nov. 22, 2004 ----------------- Four More Years Nov. 15, 2004 ----------------- The Joy Of Sox Nov. 8, 2004 ----------------- The Morning After Nov. 1, 2004 ----------------- The God Gene Oct. 25, 2004 ----------------- The Vote Battle Oct. 18, 2004 ----------------- Visions of Tomorrow Oct. 11, 2004 ----------------- The Tragedy of Sudan Oct. 4, 2004 ----------------- CBS Controversy Sept. 27, 2004 ----------------- America's Border Sept. 20, 2004 ----------------- Struggle Within Islam Sept. 13, 2004 ----------------- World of George Bush Sept. 6, 2004 -----------------   SPECIAL REPORTS  Coolest Video Games 2004  Coolest Inventions  Wireless Society  Cool Tech 2004 PHOTOS AND GRAPHICS  At The Epicenter  Paths to Pleasure  Quotes of the Week  This Week's Gadget  Cartoons of the Week More graphics >> More photos >> MORE STORIES Advisor: Rove Warrior The Bushes: Family Dynasty Klein: Benneton Ad Presidency More Stories >> CNN.com: Latest News

And Ellison? The Oracle chief, 58, can't deny he's having fun. "I love flying planes and racing boats," he says. "This is more challenging." But at the same time, he insists, he is deadly earnest about PeopleSoft — and adds that other similar offers may be on the way. "The industry went a little mad over information technology; now we have to adjust," Ellison says. "Companies are going to get gobbled up, absolutely."

Even assuming PeopleSoft fends off his offer, Ellison may yet have the last laugh. This is the era of consolidation in computerland. Companies like IBM, Microsoft, Yahoo and USA Interactive have spent billions of dollars snapping up smaller competitors. Others, like Palm and Handspring, have tried to stave off the hungry advances of these giants by merging. Now it's the turn of Ellison's realm, the complex world of business software, to go through some serious cyclical slimming. The outcome will be crucial to owners of widely held tech stocks and people who use their products, which includes just about everyone.

"When the economy isn't allowing you to get any bigger, the risk of staying a small fish in the pond is pretty big," says Tom Topolinski, vice president of the Gartner research firm. Already, 25% of the software manufacturers in existence in 2000 have disappeared, mostly by burning through their venture-capital cash. Gartner predicts another 25% will vanish by the end of 2004 through waves of mergers and acquisitions. The recovering stock market is boosting the shares of stronger tech firms more than those of weaker rivals, so there are plenty of bargains around for those whose pockets are still deep.

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%.