PeopleSoft Plays Defense

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I admire PeopleSoft's (Nasdaq: PSFT) fight. Tuesday, the business software maker announced a broad partnership with IBM (NYSE: IBM) in which Big Blue's popular WebSphere middleware will be bundled, free, with PeopleSoft's software for managing human resources, finance, customer relationships, and other business functions. At least $1 billion will be invested over the next five years for marketing and development.

It is the massive cash flows generated by PeopleSoft's applications that suitor and IBM rival Oracle (Nasdaq: ORCL) wants. The IBM deal, then, would be an especially bitter pill for the database king to swallow. Why? Because Oracle supplies its own middleware to its database customers -- software that competes with WebSphere directly. Moreover, WebSphere is designed to work well with IBM's DB2, a competitor to the Oracle database.

If you're thinking that Oracle CEO Larry Ellison probably doesn't relish the idea of inheriting a contract where he has to ship a rival's software alongside his own, you're right. But this agreement also isn't just about sticking it to Ellison, even if PeopleSoft CEO and former Ellison protege Craig Conway would probably like nothing better.

Published reports also suggest that the deal, announced to the 10,000-plus in attendance at PeopleSoft's annual customer conference, is designed to assuage users who have come to question the long-term viability of PeopleSoft. Indeed, according to a report in The New York Times, PeopleSoft claims that many customers have deferred their purchases of its software because of the Oracle bid, resulting in at least $1 billion in lost sales. (Recent financial results bear some witness to this testimony.)

So is the IBM agreement an attempt to engineer a rescue from Oracle's $7.7 billion hostile takeover by offering friendlier acquisition terms to Big Blue? Maybe from PeopleSoft's view, but I doubt it is so from IBM's perspective. After all, IBM has made most of its money lately by powering and servicing others' applications. Indeed, the global services unit generated nearly 50% of revenue for the first half of 2004. Why change an obviously successful business model now?

That said, the bundling deal makes sense for customers. They need assurances that their bet on PeopleSoft is safe, whether OracleSoft comes to pass or no. IBM gives them that, for its infrastructure software is easily on par with Oracle and Microsoft (Nasdaq: MSFT). But Big Blue is no white knight, and a rescue probably isn't forthcoming.

For more Foolish coverage of Oracle's bid for PeopleSoft:

• OracleSoft could be on the way.
• At least it should be. The database king's earnings made another strong case for an acquisition of PeopleSoft.
• But it's not all flowers and chocolate for Oracle. A PeopleSoft takeover could give it a $7.7 billion migraine.
• And you might think that's just desserts for Larry, especially if you believe the acquisition is just part of a plot to kill PeopleSoft.

What do you think? Should IBM try to bail out PeopleSoft with its own bid? Or will doing so wreck a perfectly good and profitable business? Should Oracle be worried about the prospect of an IBM takeover? Debate all this and more at the IBM, Oracle, and PeopleSoft discussion boards.

Fool contributor Tim Beyers owns shares in Oracle, and he thinks Larry should keep going after PeopleSoft. You can view Tim's Fool profile here.