Prepared by Ekaterina Kouznetsova Alexander Nagornov Serhat Uysal Alexander Parkhomenko

1. Oracle vs. Peoplesoft Case study M&A Law Prepared by Ekaterina Kouznetsova Alexander Nagornov Serhat Uysal Alexander Parkhomenko December 2007

2. Background of the acquisition • Consolidation trend in the industry • Competition with SAP: intention to gain a strong position as No. 2 • Expand customer base • Acquisition of technology, software and engineers Previously: • Failed merger plans between Peoplesoft and Oracle in 2002

3. A Bit of Financial Math • Was the bid timely? Surprisingly, yes. Bubble had completely burst – a slow but stable growth was looming

4. A Bit of Financial Math • Was it economically justified to look for PeopleSoft? • First, everything is just a question of price. But at least we should look at some basic key ratios: • PeopleSoft: CFs from operating activities are not sufficient to cover investing and financing activities (as sum for 3 years). Oracle: uses the cash from operating activities to repurchase common stock. Bottom line: • absolutely no pure financial reasons to buy PeopleSoft • the only reason: market strategy (customer base, technology…) • it seems that Oracle had some excess cash and willingness to invest it to demonstrate shareholders growth concerns

5. Timeline and highlights of the acquisition February - September 2004: - DOJ blocks the deal. - Oracle lowers bid to USD 21. - Appeal to the court: deal is approved June 18, 2003: Oracle ‘s second bid: USD 19.50 per share “We are serious” Final bid USD 26.50 is accepted. Litigations are terminated. June 6, 2006: Oracle ‘s first bid: USD 16.00 per share October 2004: - Oracle asks Delaware court to remove poison pill and CAP - Oracle’s new bid: USD 24 November 2003: - Proxy fight attempts for March 2004 annual meeting - New bid: USD 26 per share - Department of Justice deciding on blocking the deal as anti-competitive 7 June 2003: Implementation of CAP and announcement of poison pill

6. Fair price vs First Bid • Company – plummeting profits, shrinking sales, involvement in M&A • Pre-trading price $15 • Initial bid - $16 -- too low!!! • Given average premium of 40-50% - $19-$22 • Oracle - inconsistent strategy: raised bid to normal in two weeks. It seems that Oracle just wanted to buy. • Generally managers spend the money of shareholders – conflict of incentives • Notion of game theory is crucial for the process of negotiating

7. Implementation of CAP and Poison Pill • 7 June 2003 • Customer Assurance Program • Although it was argued that CAP is a new kind of poison bill, Peoplesoft repeatedly claimed that it is just for customer assurance, blocking the deal is not the motivation. • Unlike Poison pill, CAP had a binding effect and it is not possible to pull back • The liabilities created by CAP may had a negative effect on valuation • Oracle, initially didn’t worry about the CAP, however, the CAP liability continued to accrue at a ferocious pace which made Oracle to think about possible ways to remove it. • Poison Pill Flip in Poison Pill: If a single shareholder acquired over 20% of Peoplesoft’s stock, the company would issue new shares to the existing shareholders at a discounted price Poison pills do not directly block a possible merger but made it much more expensive for the acquiring company. As no shareholders approval is required to issue, Poison Pills can be removed by board decision at any time

8. Proxy Fight • November 2003: • Proxy fight: Oracle nominates five candidates for the Board of Directors (consisting of 8 members) for the coming annual meeting of Peoplesoft in March 2004 • Main purpose: remove the poison pill and approve the takeover • How: increasing the board to nine members through amendments to bylaws • Oracle makes a new bid of USD 26 per share (from USD 19) to gain shareholder’s support and prove itself serious. Appeal to “let’s get this deal done” shareholders group • Meanwhile, the Department of Justice is deciding on whether to block the deal as anti-competitive. In light of this litigation, Oracle withdraws the candidates and decides not to proceed with proxy fight.

9. Proxy Fight • Advised action: Since the court didn’t judge yet, Oracle shouldn’t have withdrawn from proxy fight. Possibility to get some candidates elected, if not all five If the deal is approved by the court, immediate action can be taken to remove the poison pill by the Board of Directors and approve a merger at a bid price of USD 26 per share Peoplesoft hiding behind decision of Department of Justice and rejecting the offer. Even though initially Department of Justice blocked the deal, the decision was overruled later by the court and Oracle could have influenced decision though the Board of Directors if it proceeded with the proxy contest

10. Delaware Court • October 2004 • Following the decision on Antitrust, Oracle sued PeopleSoft in the Delaware Court of Chancery seeking the removal of the poison pill and the injunction to stop the CAP program • Poison Pill:Court would evaluate the validity of the Poison pill under two criteria defined on Unocal vs. Mesa Petroleum case; • The hostile bid must present a “threat” to company • Defensive response (Poison Pill) must be reasonable in relation to thread posed It was generally argued that the bid is not a threat to company since it is a fully-financed, all cash offer for 100% of the shares and shareholders has enough time to consider the offer However the second criteria, reasonableness, was not clear. Delaware case-law, generally finds the pill reasonable CAP:Oracle’s argument was that the CAP was also a poison pill and must be reviewed based on Unocal criteria, while Peoplesoft argued that the CAP was just to assure customers. In Quickturn vs. Mentor Graphics decision, the Delaware Supreme Court opinion was that “a board cannot tie the hands of a future board. To the extent that a contract purports to require a board to act or not act in such a fashion as to limit the exercise of fiduciary duties, it is invalid and unenforceable”

11. Delaware Court October 2004 Before court decided, Oracle was asked to put an unconditional offer on to the table The offer was increased from $21 to $24 per share and Oracle declared that this was the final offer and that the offer would be withdrawn unless the majority of the shareholders tendered their shares by November 19th. Peoplesoft immediately declared that the offer was unacceptable and recommended shareholders not to tender. At the end of the tender period 61% of Peoplesoft’s shares tendered. Although Oracle was looking for an higher percentage to close the deal, 61% was enough to keep them in the game and re-consider the bid.

12. Deal • Board could not accept $24 as it rejected $26 before, so it rejects $24 as “inadequate” • As it became evident after 17 months PeopleSoft can get a 30%-50% downside as Oracle walks away or Strine removes the pill • 4th Quarter – PeopleSoft fundamentals might plummet in 4th quarter as most of their clients re-contract at this time • 61% shares tendered at $24 – Oracle still in the game • Large Shareholder approaches Battle to negotiate a counteroffer of $26.5 with Oracle • Oracle gives $26.5, PeopleSoft board accepts

13. Aftermath • 18 months – too long • Shareholders threshold price was $19-$22 • Pre-trading - $15 • Paid $26.5 ----------------------------------------------------------------------------------- • Initial bid of $16 was too low • Inconsistent Oracle strategy: in two weeks raised to $19.50 • Giving $26 just before DOJ said NO to the deal • Next: PeopleSoft’s Board will not accept bid lower than $26 • Deliberate pill trigger – should have a strategy. Backward induction – “looking forward reasoning back” • Oracle did not negotiate with PeopleSoft board before bid, PeopleSoft board did not communicate later

14. Thank you