Wednesday, October 08, 2003

Antitrust News: The Oracle Battle Looms

Tom Taulli discusses the implications of the looming antitrust war over Oracle-PeopleSoft at the Motley Fool:
Last week, a story indicated that the Justice Department is soliciting statements from customers of Oracle and PeopleSoft. The implication, obviously, is that the department might attempt to block the deal.

Before jumping into the fray yourself, keep in mind that antitrust confounds even highly paid, ridiculously specialized experts. It doesn't help that there's little new to go on. Mergers & Acquisitions (M&A) activity has been almost non-existent in recent years, and regulators simply haven't had the opportunity to indicate their views on antitrust.

This will change, and the Oracle case is likely to have considerable impact -- especially as relates to the technology sector.

Ultimately, this particular case comes down to defining the relevant market. PeopleSoft will argue that the combination leaves only two main companies for ERP (enterprise resource planning) software. If there is any unanimity in antitrust, it is that three-to-two mergers almost always get blocked.

Oracle, on the other hand, claims that ERP is a fiction. Instead, the company believes that there are many submarkets within the enterprise software market and companies have many applications to choose from.

But expect regulators to pull a surprise and consider novel theories, such as incumbency. ERP installations are expensive and time-consuming, and switching providers is a headache. It will be temping for dominant companies to exert power over customers (if past behavior is any predictor, Larry Ellison might give in to this temptation).

Bottom line, this deal is extremely complex (it gets even worse if you look at state antitrust actions, as well as those from the European Union). But whatever the courts decide, it will have a significant impact on future M&A in big tech. That's the real story here.

If Oracle gets a free ride, expect more combinations across the board. If not, the outcome could throw cold water on deal activity for years to come.
The lack of M&A activity also explains why the FTC and DOJ have turned their attention to seemingly trivial conduct cases, such as their prosecutions of "price-fixing" physicians and private ethical codes. In the absence of substantial M&A activity, the antitrust agencies need something to justify their continued existence; reducing the size of the agencies is obviously never an option for any government bureaucracy (only for private firms that must generate profits to survive).

Susan Creighton, the FTC's chief antitrust regulator, made her name expanding antitrust's reach into the tech industry. In the past year she's pushed prosecutions to undo two relatively insignificant tech mergers in markets far smaller than Oracle's. Both the FTC and DOJ are filled with pro-antitrust Republicans raised in the shadow of the Microsoft case. I expect an aggressive push to stop the Oracle-PeopleSoft deal, and for that matter any major tech merger attempted in the next few years. The Bush administration has made a conscious decision to use antitrust in place of overt regulation to micromanage the tech sector. If they push too far, however, the result will likely be a prolonged tech stagnation which will hurt overall economic growth. But don't expect the higher-ups in the White House to figure that out before it's too late.

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