European antitrust regulators announced on Monday that they're extending their review of Oracle's hostile bid for PeopleSoft into an in-depth second phase.
The decision by the European Commission, which serves as the antitrust agency for the European Union, will prolong the review by up to four months, a move that was largely expected given the size of the deal and Oracle's presence in Europe.
"The Commission will, in particular, investigate the impact of the transaction on the markets for business applications software used by large multinational companies to coordinate and plan their financial and human resources and their relationship with customers, among other things," the Commission said in a press release.
European regulators also said their initial one-month investigation has shown that a possible merger of two of the largest competitors in the business applications market merits a closer examination because "the number of key players would be reduced from three to two -- Oracle and SAP -- in certain applications software markets."
In addition to looking at the effects on the business applications market, European regulators may also review the potential effects to the relational database market, Oracle's core strength.
"The European Commission's decision is consistent with what we have said before. Oracle's unsolicited tender offer faces serious antitrust concerns," said Steve Swasey, a PeopleSoft spokesman. "Our board has previously said there was a significant likelihood the deal would be prohibited."
During the four-month investigation, European antitrust regulators can make a decision at any point to approve the deal, allow it to go through with modifications, or reject it.
"We have said before that we felt a phase-two review would be initiated, so we are not surprised by the European Commission's decision. We continue to work closely with the EC throughout this process," Oracle spokesperson Jim Finn said in a statement. "We are in this for the long haul and we remain committed to completing our intended acquisition of PeopleSoft."
The European Commission "has become a key player in antitrust in recent years. The G.E. and Honeywell deal was a substantial case for them," said Howard Morse, a former senior official with the Federal Trade Commission's high-tech antitrust division and a partner with law firm Drinker Biddle & Reath in Washington, D.C. "In order to go ahead with a merger, you have to have clearance on both sides of the Atlantic."
In the General Electric and Honeywell International case, the Department of Justice had approved the merger, but the European Commission rejected the deal, signalling the first time the commission had blocked a merger between two US companies. The companies appealed the 2001 decision and are awaiting a ruling by the European Court of First Instance.
The commission is under no obligation to arrive at a decision similar to that of the Justice Department or FTC. However, in recent years, there has been more of an effort to coordinate and communicate during merger reviews, antitrust attorneys said.
Although European regulators are moving the Oracle-PeopleSoft case into a second phase, it does not necessarily mean the commission will challenge the deal.
However, under competition commissioner Mario Monti, the European Union has been more aggressive on challenging mergers, said Stan Gorinson, who heads the antitrust efforts at Kilpatrick Stockton in Washington, D.C., and formerly served as antitrust chief of the Justice Department's special regulated industries unit.
Gorinson also noted that the commission's decisions have been reversed on several occasions within the last year.
"The EC has had three or four cases reversed in the Court of First Instance," Gorinson said. "They have been criticised for their analysis, with the court saying it did not have economic or factual support."
While the success of Oracle's takeover bid appears, in part, to rest on how broadly, or narrowly, regulators define the relevant markets, it will face an "uphill climb" after regulators have publicly redefined those areas of interest, said one former high-level antitrust attorney in the US Department of Justice.
"It will be difficult for Oracle to prevail," the attorney said. "Although SAP has a huge market share lead, the issue is not whether this deal would create a monopoly. The question is whether if PeopleSoft and Oracle merge, will it raise prices, even incrementally, and make it stick for some time."
However, the attorney added that the way the European regulators have defined the relevant market is not necessarily how the Justice Department will view it.
Meanwhile, the US Department of Justice is deciding whether to challenge Oracle's takeover bid. Oracle has previously said it expects the Justice Department to wrap up its antitrust review by December or January.
Europe has played a significant role in Oracle's first-quarter earnings performance. Revenue from the region, combined with the Middle East and Africa, represented 35 percent of the company's total revenue in that quarter, and contributed a 9 percent year-over-year increase in new license revenue. The company posted a 6 percent decline overall.
Oracle's archrival in the business applications market is SAP, based in Germany. SAP holds the largest market share, with a substantial lead, while Oracle and PeopleSoft are in a close race for the No. 2 slot. SAP, meanwhile, has widened its lead, attributing its sharp rise in third-quarter revenue to confusion in the marketplace.
State attorneys general from 38 states and Canada's Competition Bureau are also continuing to review Oracle's hostile takeover bid.
