When PeopleSoft moved to acquire rival J.D. Edwards Monday, it marked the latest in a series of mergers between software vendors, but it also jogged the competitive landscape in the market for selling business application software to customers.
Analysts said that while the deal presents a significant upside for PeopleSoft, J.D. Edwards and their customers, who will be able to get more applications from one vendor, it also presents major challenges for the two rivals to integrate partners, products and existing infrastructures. And despite the merger, Germany’s SAP is still the largest business application vendor — by a long shot.
The play and the field
Pleasanton, Calif.’s PeopleSoft, which competes on various levels with SAP, Oracle, Siebel and Microsoft in the market for selling software for enterprise resource management and human resource management, will gain new access to mid-market customers looking for supply chain management applications, which is Denver-based J.D.Edwards’ specialty.
Business software providers often target small, medium and or large classes of businesses. As a provider of software for large-scale firms, PeopleSoft could very well become SAP’s greatest competitor. Oracle covers a lot of ground in the high-end and mid-market application space, as does Siebel. Microsoft tends to sell to the small- and mid-sized market.
PeopleSoft bases a number of applications for CRM, enterprise resource planning (ERP) and supply chain management (SCM) on its flagship Internet-based platform, PeopleSoft 8, which lets an enterprise combine online transactions with customers, suppliers, and employees. J.D. Edwards’ 5 suite provides the infrastructure for its collaborative enterprise applications, spanning CRM, SCM, ERP and others. The toolset gives a business the ability to use and change J.D. Edwards software to keep its technology in step with business requirements.
PeopleSoft President and CEO Craig Conway discussed the deal, made for $1.7 billion in stock, in a conference call Monday.
“This merger cannot be more compelling,” Conway said. “This is one of the most natural and compelling acquisitions in the software industry.”
In a question and answer session after the details were revealed, Conway put down speculation that the merger will pose problems because of the oft-difficult task of integrating competing businesses with overlapping products, as well as difficulties with corporate culture conflicts. Conway said the integration would be synergistic and claimed the cultures were similar.
“Many large mergers have had problems because there were flaws in the businesses, or there were no clear product synergies or coordinated management teams,” Conway said. “PeopleSoft and J.D. Edwards are both successful, profitable businesses. We’ve continued to accelerate growth and by combining our strengths hope to produce a strong product set.”
Analysts agreed the news bodes well for PeopleSoft, who is looking to cover more ground in the mid-market. Jon Derome, program manager of the Business Applications & Commerce unit at the Yankee Group, said one upside to the deal for PeopleSoft is solid customer acquisition credibility from J.D. Edwards. He said PeopleSoft has strong HRM and financial applications it can offer to J.D. Edwards customers, while J.D. Edwards can hawk its asset and manufacturing applications to PeopleSoft customers. With the new, integrated sales force working together, the firm could fill in holes the vendors had as separate entities.
However, while the deal provides definite synergies between two leading vendors, Derome said there are certain challenges the two must reconcile. One of those, he said, is how to migrate J.D. Edwards installed customer base and products from its AS400-based platform (now rendered as IBM’s iSeries midrange servers), an antiquated system he dated to the previous Bush administration, to PeopleSoft’s Web-based infrastructure. Going from one code base to another will also be challenging.
Gartner Principal Analyst Ted Kempf said any integration of two like companies is going to be complicated, but it “definitely can happen. They need to keep their eye on both the implementation of new partners and channels, as well as their applications, so they don’t lose customers.”
Paul Hamerman, a director at Forrester Research, said that while there are definite synergies as a byproduct of this purchase, there are significant product overlaps because both firms sell CRM, financial, HR, manufacturing and supply chain software.
“I just don’t think it’s as easy as they made it sound,” Hamerman said. “The company is going to have to rationalize the product lines and they need to look at at the technology architectures of the different product lines to make them work together.”
Participants on the conference call also asked the parties if they were concerned about clashing corporate cultures. Conway demurred, but Hamerman thinks this too is a legitimate concern.
“I don’t buy that at all,” he said. “PeopleSoft used to be about the customer, but they have become much more corporate-oriented since Conway moved in there.” Hamerman acknowledged that J.D. Edwards may be leaning that way, with the addition of Chairman, President and CEO Bob Dutkowsky.
The competition and the market
What can the IT world expect from the competition’s reaction? Probably not much, if it’s concerned about what SAP thinks. Though Derome thinks SAP’s growth potential could be threatened by moves like the PeopleSoft/J.D. Edwards merger in three to five years, Hamerman said even with this purchase, SAP’s licensing revenues are greater than those of the other major vendors put together. That includes PeopleSoft, J.D. Edwards, Oracle and Siebel. Still, Hamerman was loathe to call PeopleSoft the No. 2 business application vendor to SAP when Oracle is worth $10 billion with 27 percent of its revenues derived from its business applications. He suggested PeopleSoft shares that slot with Oracle and Siebel because SAP is so dominant. As PeopleSoft’s arch-rival, Oracle would seem to be the most threatened, Hamerman said.
“When you have two strong companies merge, it’s going to raise everybody’s eyebrows,” Kempf told internetnews.com. PeopleSoft is looking to get its ducks in a row. Two strong companies that raise everybody’s eyebrows. There will be new forms of competition from different applications. For example, if Oracle was not worried about their financial applications for the midmarket, maybe they are now.”
Hamerman said the deal is being done at a time when the market for enterprise applications has matured and declined, when the No. 1 vendor gains at the expense of the consolidation of others. Going forward, he and Kempf expect additional consolidation at the mid-market level, and for larger vendors to pick off smaller ones with the goal of gaining more market share in that segment.
To be sure, Derome said the Dutch company Baan could be one such target of Oracle because it has a great client base and holds similar application functionality to Oracle’s suites.