Poison pills and white knights: doing business with an ERP industry in transition.(enterprise resource planning)

Industry turmoil resulting from the burst of the tech bubble and the recent merger mania facing some of the largest software firms has left governments anxious about the products they own or were considering purchasing. This period of uncertainty is an opportune time to evaluate ERP industry practices and discuss areas in need of improvement and reform.

More than 60 years ago in Capitalism, Socialism and Democracy, economic historian Joseph Schumpeter described capitalism as a "process of creative destruction." Schumpeter suggests that "situations emerge in the process of creative destruction in which many firms may have to perish that nevertheless would be able to live on vigorously if they could weather a particular storm." (1) The enterprise resource planning (ERP) marketplace is living through its own process of creative destruction. The industry itself is facing sluggish demand for software, which in turn impacts firms that provide implementation services. Software firms are undergoing mergers and acquisitions, while upstart mid-size implementation firms are challenging the dominance of the larger consulting companies. The only thing that seems certain is that the go-go years of the 1990s are gone forever and the future will be painful for buyers and sellers alike. It's not the beginning of the end for ERP, but it is certainly the end of the beginning.

MERGER MANIA

While turmoil is common in the enterprise applications industry, it has reached new heights this year. In the Tier I ERP marketplace--the sector serving large and complex organizations with software for a broad range of financial management and administrative functions--industry analysts began examining the possibility of consolidation among three of the top four linens. On June 2, 2003, PeopleSoft announced the acquisition of J.D. Edwards. (2) Days later Oracle announced its intent to acquire PeopleSoft by end-running management and appealing directly to shareholders with a $5.1 billion initial offer that grew to $6.3 billion a few weeks later. PeopleSoft management immediately resisted the takeover, citing antitrust concerns and unfair practices. PeopleSoft's CEO went so far as to characterize the offer as "atrocious behavior from a company with a history of atrocious behavior." (3) Arguing that consolidation of smaller firms to the technology giants is inevitable, Oracle's CEO boldly stated, "There are a lot of Silicon Valley companies that need to go out of business" and that "best of breed is dead, except for dog shows." (4)

Industry analysts speculated that the Oracle takeover of PeopleSoft could be repelled through a "poison pill"--a provision that empowers the PeopleSoft Board of Directors to issue new shares at a discount when a hostile bidder acquires 20 percent of the common stock. Corporate reformers have argued that management often uses poison pill provisions to protect its own hide at the expense of shareholders. Though Oracle's initial offer was greeted with skepticism, it assumed greater credibility when it was raised by $1.2 billion, increasing the chances of PeopleSoft shareholder support. Some analysts suggested that PeopleSoft could seek a friendly buyer--a "white knight."

Where did all of this jockeying leave J.D. Edwards? What about corporate giant Microsoft--a more recent entrant into the ERP market with intentions to invest billions in product development? What will be the response of the other tech giants--IBM, HP, and Sun Microsystems? In this age of poison pills and white knights, is there any way that customers can protect the stability of their mission critical systems?

No matter how the J.D. Edwards-PeopleSoft-Oracle episode turns out, it has introduced considerable anxiety in the marketplace--certainly for customers and potential customers of the companies involved, but also for nearly anyone associated with the industry. Some industry analysts have suggested that customers defer purchasing software, especially from those players whose product lines might be wiped out, until the industry stabilizes. Others argue that buyers of ERP software should move forward but install aggressive provisions in contracts that penalize software firms if they are acquired.