Last Monday, in move that took many by surprise, PeopleSoft announced that it will acquire iSeries software provider J.D. Edwards in a stock deal worth $1.7 billion. The combined firms will generate an estimated $2.8 billion in revenue, making PeopleSoft the second largest enterprise application vendor in the world. More importantly, PeopleSoft's announcement could set off a wave of acquisitions that would have substantial implications for software customers.

Under the agreement between the two firms, J.D. Edwards' stockholders will receive 0.86 shares of PeopleSoft's common shares for each of their outstanding shares. This will create a company in which J.D. Edwards' stockholders own a 25% stake. Once the acquisition closes in the late third or early fourth quarter, J.D. Edwards will operate as a wholly owned subsidiary of PeopleSoft. Taken together, the combined firms will have 13,000 employees and more than 11,000 customers in 150 countries.

In comments made during a telephone conference last Monday, both firms pledged that the acquisition will not reduce their commitments to existing customers. In particular, PeopleSoft CEO Craig Conway stressed that J.D. Edwards' iSeries customers are an important asset that will receive ongoing support from PeopleSoft. When pressed by analysts on what products PeopleSoft would eliminate or consolidate, Conway stated that very little of what he called "product reconciliation" would occur. Indeed, he talked at length about adding PeopleSoft solutions to the J.D. Edwards product line in areas where it is weak, such as in human resources and contract administration.

The Acquisition--Reasons and Implications

Before I offer my assessment of this acquisition, you should know that my company, Andrews Consulting Group, is one of J.D. Edwards' leading implementation partners in North America. That said, you should also know that I am paid to offer our clients unbiased and objective advice rather than to sell them software. What I am telling them is precisely what I am about to tell you.

From where I sit, the PeopleSoft-J.D. Edwards deal makes a tremendous amount of sense. To understand why it does, one has to understand the challenges that the two firms face as they are struggling to grow in a difficult environment for software spending. As a vendor to large enterprises, PeopleSoft faces growing competition from SAP, a company that is over four times larger than PeopleSoft and has a broader line of solutions that appeal to more industries. When competing against SAP for manufacturing and distribution customers, PeopleSoft suffers from its lack of solutions for asset-intensive industries. By acquiring J.D. Edwards, PeopleSoft gains these solutions, allowing it to compete more effectively for manufacturing and distribution accounts. It also gains the world's largest provider of core business applications to mid-size companies, an asset that will allow it to compete against SAP's Business One family of applications for the middle market.

As a vendor to mid-market firms, J.D. Edwards also faces limited growth prospects because of product weaknesses that its competitors don't suffer from. Historically, J.D. Edwards has been the leading application vendor to mid-sized manufacturing and distribution firms, but has lacked the solutions and expertise to expand beyond these segments to the services sector. PeopleSoft provides these solutions, particularly in the human relations, contract management, and services administration areas. By integrating such solutions into its J.D. Edwards 5 product family, the software vendor could compete for mid-market accounts in industries such as financial services, government, and healthcare. These are markets where vendors such as Infinium--which was acquired last year by SSA--and Lawson Software have been more successful.

In addition, the PeopleSoft acquisition gives J.D. Edwards the resources it needs to compete against an impending threat from a much larger and better-funded competitor: Microsoft. With its recent acquisitions of Great Plains and Navision, Microsoft has become a $550 million provider of core business applications to small and mid-size companies. By the end of this decade, however, Microsoft wants to expand its share of that market to $10 billion. To do so, it will make a $2 billion investment over the next year to beef up its business solutions and recruit new distribution channels. Faced with a software giant that can invest billions to take over its market, J.D. Edwards needs PeopleSoft to maintain its standing among mid-sized companies. In addition, PeopleSoft provides J.D. Edwards with an opportunity to sell its software to large enterprises that would not consider Microsoft's business solutions.

These are the major reasons for the acquisition, and they will drive most of the decisions that the combined firms will make about their product strategies. Based on what I've learned from the two vendors, here is my forecast of how the acquisition could change those strategies:

• There will be little change to the two firms' core product lines. Since there is little overlap between the two firms' customer sets and IT requirements, there is little likelihood that either firm will drop support or development efforts on any of their core products. Both firms are stressing that customer retention is critical for them and that they do not want to force customers into difficult migrations. As such, I expect little or no change to J.D. Edwards' core enterprise resource planning modules. On the other hand, look for J.D. Edwards' core manufacturing solutions to start appearing in PeopleSoft's product lines while the latter vendor's human resources and services software migrate to J.D. Edwards 5.
• Product consolidation will largely take place at the "edges" of each firm's application portfolios. The place to look for product consolidation will be in each vendor's newer product lines where few customers have made significant investments. This could include areas such as customer relationship management, where the combined firms could consolidate the products that PeopleSoft acquired from Vantive with the J.D. Edwards solutions it acquired from YOUcentric. A similar consolidation could take place in the supply chain management area between PeopleSoft's Red Pepper solutions and J.D. Edwards' Numetrix applications. Companies using these solutions should engage the combined vendors in serious discussions about product directions before they make any further investments.

While the acquisition will affect the product strategies of the two vendors, its greatest legacy could be the mergers between other software vendors that it may spur. By acquiring J.D. Edwards, PeopleSoft could induce other first-tier vendors such as Oracle to purchase their own share of the middle market. Meanwhile, faced with greater competition from Microsoft and the J.D. Edwards wing of PeopleSoft, mid-market software vendors may seek combinations with each other or with larger vendors. As such, the PeopleSoft acquisition could set off a wave of consolidations as mid-market vendors try to survive in a selling environment that is getting more competitive by the minute.

* * *

Now that I have returned from my vacation, I would like to thank Bill Rice for taking over the news and analysis beat for MC Press during my absence. As any of you who have read his articles over the last two weeks know, Bill did an excellent job of covering for me.

I would also like to announce the winners of my contest to guess where my wife and I went for our vacation. Congratulations are in order for MC Press reader Phil Edwards who nailed all of the correct answers. Phil identified the country where we vacationed (Italy), the lake where we stayed (Lake Como), the landlocked province we visited (Umbria), and the province with tufa rock formations and sheep cheese (Tuscany) that we toured. Kudos are also due to Stan Buehrer, who got all the right answers except for one (Campania instead of Tuscany) but proved to me that Campania fits the clues I offered. Until next week, arrivederci!

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology. You can reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology.

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