U.S. v. Oracle Corporation - Three Lessons To Be Learned About Merger Review

On September 9, 2004, the United States District Court for the Northern District of California, Judge Vaughn Walker, issued its much anticipated opinion in the Department of Justice's ("DOJ"), case against Oracle Corp.'s ("Oracle") attempted acquisition of PeopleSoft, Inc. ("PeopleSoft"). Oracle and PeopleSoft both develop, manufacture, and sell "enterprise resource planning" ("ERP") software, designed to "integrate[] most of an entity's data across all or most of the entity's activities."1 In more basic terms, ERP software is used by a company to help manage specific business/administrative functions, such as human relations management ("HRM"), financial management systems ("FMS"), customer relations management ("CRM"), or supply chain management ("SCM").

The theory behind the DOJ's case was that Oracle and PeopleSoft are two of the three largest producers of HRM and FMS ERP software for large businesses in the U.S. In each of the U.S. markets for "high function" HRM and FMS software, the DOJ alleged, there are only three competitors - Oracle, PeopleSoft and SAPAG, a German software company with operations in the U.S. According to the complaint, if allowed, Oracle would acquire its closest rival, conferring on it the ability to raise prices unilaterally.2

The District Court found in favor of Oracle and denied the DOJ's request for an injunction. In a 36-page published opinion that is highly fact-intensive and relies heavily on antitrust economics, the Court detailed its disagreement with virtually every DOJ allegation. The Court completely rejected the alleged product market definition of "high function" HRM and FMS software targeted to large businesses (a product market that included only Oracle, PeopleSoft, and SAP), finding instead that software companies that make ERP software for "mid-market" customers also compete for those same "large complex enterprises." The Court also found that other solutions competed with HRM and FMS ERP software, namely outsourcing and best-of-breed solutions.3 The Court also disagreed with a geographic market definition limited to the U.S.4 Finally, even assuming these market definitions as correct, the Court found that there was no localized competition between Oracle and PeopleSoft, the elimination of which could possibly lead to higher prices through unilateral effects.5

The Court's opinion is of particular interest not just because of its detailed analysis of a unilateral effects case, but also because of what it teaches us about the types of evidence a court is likely to find persuasive (or in this case, unpersuasive) in proving the basic elements of a merger case. Three of the more important lessons are:

1. The Product Market Definition Must Be Supported by Industry Realities

Much of the Court's opinion was spent dispelling the DOJ's proposed market definition - "high function HRM software" and "high function FMS" software for use by "large complex enterprises." These products, the DOJ alleged, compete in markets separate and distinct from other ERP products, like CRM or SCM software, and mid-market HRM and FMS software, products...