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The Urge to Merge

As software companies fight it out, must customers pay the price?

Jim Prevo, chief information officer at Green Mountain Coffee Roasters in Waterbury, Vt., understands why, early in the last century, the ranks of automobile makers narrowed from more than 100 to just a handful. Yet, as a similarly momentous consolidation looms over the enterprise software market, this longtime PeopleSoft customer is getting worried. And angry.

For car buyers, adapting to change was simple, he argues. “You could step out of your DeSoto and into a Chevy and be on your way.” But for Green Mountain, he says, PeopleSoft’s ERP software is analogous to a brain, a vital organ that powers everything from the general ledger to complex supply-chain and employee-benefits systems. “And what Oracle’s saying is, ‘We’re going to keep your brain’s function static for the rest of your life. Or, you can switch to our software.’ ” But switching to Oracle, or to a competitor, for that matter, Prevo says, “is the equivalent of performing a brain transplant. It’s expensive, and it might kill us.”

Unfortunately, Prevo is not alone in feeling as though his interests are playing second fiddle to those who own and run enterprise software companies. After years of growth and scores of new suppliers entering the market, a massive wave of consolidation appears to be under way. Simply put, “there are too many vendors and not enough paying customers,” says Chris Selland, managing director of Cambridge, Mass.-based Reservoir Partners LP, a research and consulting firm focused on high-end software. “Oracle has just decided to get ahead of the trend.”

Oracle’s attempt to buy PeopleSoft is merely the most visible manifestation of an indisputable trend — one that, while often couched in terms of benefits to customers, will certainly cause plenty of disruption in the near term. “This has been an epiphany for me,” says Prevo. “I suddenly realized that the public-capital model is in direct opposition to the interests of users. What I need is a stable technology platform so that my enterprise can change. But now there’s a huge risk factor I never thought of. In private ownership, the owners have a different relationship to customers, a level of integrity and loyalty. But in the public model, the owners may see an opportunity to make 20 percent on their money and they’ll say, ‘Great, I’ll cash out!’ That’s dangerous.” Prevo, in fact, says that “if [Oracle] is successful” in acquiring PeopleSoft, “I will recommend to my board that we bring [software] development in-house.”

That would be a bitter irony for growth-minded software companies, because their primary motivation for making acquisitions is to bulk up on customers. “This is a market land-share grab,” says Betsy Burton, a Gartner vice president. “There’s not much in the way of advanced function or technology that Oracle needs from PeopleSoft,” she says. The two firms’ ERP suites already overlap a good deal. But in addition to thwarting PeopleSoft’s own plans to acquire J.D. Edwards, which PeopleSoft announced only four days before Oracle made its hostile bid for PeopleSoft, Oracle also needs to find new avenues of growth as its core database market matures. Given the right incentives to stick around, PeopleSoft’s 5,000 commercial, academic, and government customers could generate substantial revenues and profits for Oracle for many years to come.

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