Despite record oil prices, rising interest rates, a flood of earnings warnings and a volatile election less than a month away, stocks have been heading steadily higher ever since they bottomed on August 12, with the beleaguered NASDAQ leading the way. Today’s downer notwithstanding, I haven’t been surprised by the rally, nor should have been my readers. An exclamation point to the run-up was added a week ago Friday, when the composite index jumped more than 2% on the session. It’s no coincidence that equities surged on that day especially. Here’s my theory.
Last Friday was when the Department of Justice announced it wouldn’t appeal a court decision allowing Oracle to pursue its hostile takeover of PeopleSoft, despite the government’s antitrust objections. And on the same day, PeopleSoft’s board of directors fired Craig Conway, the chief executive who had used antitrust concerns to fend off Oracle’s unwelcome advances.
Loyal readers might remember that I was, and still am, a very concerned shareholder of PeopleSoft. In February I wrote three scathing columns (here, here, and here) arguing that there couldn’t possibly be any sensible antitrust issues in a merger in the wide-open and rapidly evolving field of enterprise software. And I berated CEO Conway for fanning the flames of the DOJ’s antitrust objections. It’s not fair to shareholders to create a situation in which Oracle could end up being legally prohibited from buying PeopleSoft, no matter at what price. Rather, Conway should be working to help us shareholders make a profit on our shares, not keeping buyers away with legal pretexts.
The courts agreed with me on the antitrust issues to such a degree that the DOJ decided not to bother to pursue the matter further. Now, with Oracle free to buy PeopleSoft — or, I should say, to compete with other potential acquirers to try to buy PeopleSoft — the software maker is worth more. And so are all companies, because last Friday’s events proved that if you try hard enough, you can overcome any barrier on the way to economic success, even when the federal government stands in the way.
Oracle’s CEO, Larry Ellison, showed a lot of guts when he decided to fight the feds on this one. Usually, when Justice or the Federal Trade Commission announce they will oppose a merger on antitrust grounds, the acquiring company abandons the deal. Or the acquirer agrees to a set of compromises and restrictions that, in the end, usually leaves it sorry it did the deal in the first place.
Not Ellison. He fought the law, and the law didn’t win. Brave indeed, but Ellison learned from the master: Bill Gates. It wasn’t so many years ago that Ellison joined with several other Silicon Valley executives to bring down the wrath of the antitrust cops on Microsoft. But Gates didn’t cave, even when Microsoft was found guilty of abusing its monopoly position and a federal judge ordered the company broken up. Gates had the courage to keep on filing appeals and turning down settlement offers, until finally he worked out a deal that left his company intact, and involved no particularly onerous changes to its business practices.
At the same time as the court agreed with me on antitrust grounds, PeopleSoft’s directors agreed with me about Conway. When they gave him the boot, it was a rare act of courage for a public company’s board, most of which are obsessively loyal to the CEOs whom they are supposed to supervise. But the board was right: Conway was an example of the sad fact that sometimes capitalism’s worst enemies are the capitalists themselves.
All too often, CEOs forget that they are in the corner office to serve the interests of shareholders. It’s the shareholders who are the true capitalists; the CEO is just their hired help. And when he does a bad job, or gets in the way of shareholders’ best interests, he’s gotta go.
Conway has been in court this week, in connection with a lawsuit in Delaware concerning PeopleSoft’s “poison pill,” another anti-takeover mechanism engineered by Conway. According to the Wall Street Journal’s account of the trial, Conway admitted that his rebuff of Oracle involved “a campaign of ‘vilification’ aimed at Oracle and its chief executive.” To give you some idea of what that means, the Journal reported that Conway had to clarify “that he referred to Oracle as a ‘sociopathic company,’ but denied calling Mr. Ellison a sociopath.”
For Conway, Oracle’s attack on PeopleSoft wasn’t just business — it was personal. Yes, in some sense, a hostile takeover is always personal for a CEO in Conway’s position. You get a huge payout on your “golden parachute,” but you lose all the perks and prerogatives of being big man on your corporate campus. For Conway, though, there was the added sting of the fact that he had once worked for Oracle, and had been fired by none other than Ellison.
So now the DOJ’s antitrust worries are out of the way, so Oracle is free to pursue PeopleSoft. And Conway’s personal agenda is out of the way, so PeopleSoft is free to be pursued by Oracle. Shareholders are now able to find out just how much their company is worth. PeopleSoft’s board has let it be known that it’s interested in talking, and Oracle says its $7.7 billion bid is still good.
Just as important, the software industry is now free to grow up. Just like so many other industries over the decades, this one is finally ready to go through the process of recombination and rationalization that will make some companies stronger and make others leave the stage entirely.
There are dislocations along the way, and there are surely both winners and losers. But it’s all part of the way capitalism works — as the great economist Joseph Schumpeter called it, “creative destruction.” Over time, it’s absolutely essential to economic growth, innovation and wealth creation. And, not coincidentally, it’s absolutely essential to a truly healthy stock market. So maybe the PeopleSoft story sent a message to investors: that capitalism is alive and well in America, both thanks to, and in spite of, the capitalists.
The following is an “Ahead of the Curve” column published October 8, 2004 on SmartMoney.com, where Luskin is a Contributing Editor.