Posted on 02/27/2004 12:41:10 PM PST by frithguild
LARRY ELLISON IS one of the richest men in the United States. But as an investor, I'm not jealous of the founder of Oracle (ORCL). Let me tell you why.
I happen to live quite near him in a town in Silicon Valley, and almost every day I drive by the site of the astonishing new home he has spent the last several years building. On what is perhaps the most expensive residential acreage not just in California but in the world, he has built a 45-acre Japanese palace and installed himself as shogun.
You can't drive by it without thinking of an old joke: "What's the difference between God and Larry Ellison? God doesn't think he's Larry Ellison."
I couldn't begin to match the splendor of his home. But there's one thing I can do that Larry Ellison can't do. I can buy shares of PeopleSoft (PSFT) any time I want. After all, it's a public company. All I have to do is put in an order, and the same is true for you. Capitalism is a wonderful thing.
But not for Larry Ellison. When he wants to buy PeopleSoft and right now his company, Oracle, wants to buy the whole thing he has to go hat in hand to bureaucrats in Washington and Brussels and try to convince them that buying PeopleSoft won't make him a criminal.
That's right, this is another column about Oracle's attempted hostile takeover of PeopleSoft. Why? Because email continues to pour in from readers about my two previous columns on it (I'm Mad as Hell at PeopleSoft and We, the PeopleSoft). And because on Thursday the Department of Justice and the attorneys general of six states announced that they would block the acquisition on antitrust grounds.
Let's set aside the matter I reported in my earlier columns, that PeopleSoft Chief Execuitve Craig Conway has been lobbying the DOJ to block the deal, seizing the antitrust laws for use as his own personal weapon in a business rivalry. Let's set aside that shareholders like me are justifiably up in arms because Conway's apparently successful strategy will likely prevent us from selling to Oracle at the tender price of $26 nearly five bucks better than the current price. But before we set all that aside, let me just say as a shareholder: Thanks for nothing, Mr. Conway.
Beyond all that, there's a much larger issue at stake here. It's the issue of how antitrust law is going to be interpreted and enforced in this country, and what risk that might present for our economy.
To block an acquisition on antitrust grounds, the DOJ must assert (and possibly defend in court) that the acquisition will reduce competition and raise consumer prices in a particular product market. The narrower the definition of "market," the more likely the acquisition will be seen as anticompetitive.
Let me make an absurd example, just to drive home the point. Suppose that you own a company that competes with two other companies making red, button-down short-sleeved shirts. You want to achieve greater manufacturing efficiencies, so you decide to acquire one of your two competitors. You think maybe those efficiencies could even allow you to offer lower prices to your customers and help you make your red, button-down short-sleeved shirts a bigger and bigger factor in the clothing market.
But no, the DOJ tells you that you can't do it. It decided that there's no such thing as the clothing market. Instead, it decided that there's a separate and distinct market for red, button-down short-sleeved shirts, and it couldn't possibly allow competition in that market to dwindle to two from three (because its computer models say that fewer competitors in a market means higher prices, no matter what).
Sadly, this example isn't so absurd. Last year the DOJ blocked the acquisition of Dreyer's Grand Ice Cream (DRYR) by Nestle (NSRGY) on the grounds that it would narrow competition to two from three in what it called "the market for super-premium ice cream." Did you even know there was such a market? Well, you do now. The two companies ended up doing their deal, but they had to agree to have the DOJ dictate to them all manner of product and distribution divestitures.
The DOJ is arguing just as Conway scripted them to that Oracle and PeopleSoft are two out of three competitors in the narrowly defined market for enterprise human-resources and financial software systems serving the very largest corporations and governments. The third one is the leader in the market, SAP (SAP). By including not only a description of the product but also a description of the particular kind of customer who currently uses it, it's like talking about the market for red, button-down short-sleeved shirts for blonde, left-handed piano players. Now that's a narrow market.
But wait. Surely the DOJ will take into account that the market is ever-changing, especially the market for technology-driven services. Surely it recognizes that even if the competitors dwindle to two, there's nothing stopping a new competitor from arising on the scene. In fact, Microsoft (MSFT) has made it clear that it intends to spend billions to compete in this very market.
Guess again. The New York Times reported Friday that R. Hewitt Pate, the newly installed assistant attorney general of antitrust, has stated that "the agency's lawyers did not consider the possibility of future competitors in making their decision."
That absurd confession by Pate may be the wedge Oracle needs to fight the DOJ in court, as the company announced Thursday that it'll do.
If Oracle can't prevail, then PeopleSoft's shareholders can kiss Oracle's $9.4 billion deal goodbye. And the American companies PeopleSoft and Oracle can continue to play second and third fiddle to Germany's SAP, while the politicians babble about losing jobs to overseas competitors.
Just how much devastation are we going to let antitrust law wreak upon our economy? Does it take a genius to see that when the DOJ won its antitrust judgment against Microsoft, it just happened to be nearly the exact moment the Nasdaq topped out back in 2000? Is it too great a stretch to wonder whether WorldCom would've had to cook the books if the DOJ hadn't blocked its plans to merge with Sprint (FON) at about the same time?
So don't envy Larry Ellison as he sits in his private Japanese palace. For the rich really are different. They are far less free. You and I can buy PeopleSoft. Larry Ellison can't.
On the other hand, don't take too much comfort. Sure, we can buy PeopleSoft now. But thanks to the DOJ, we live in an economy being increasingly throttled by intrusive and capricious antitrust enforcement.
In fact, give the Department of Justice a couple of more years and maybe it'll figure out a reason why you and I can't buy PeopleSoft either.
Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com.
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