2005/621/EC: Commission Decision of 26 October 2004 declaring a concentration to be compatible with the common market and the functioning of the EEA Agreement (Case No COMP/M.3216 — Oracle/PeopleSoft) (notified under document number C(2004) 4217)   (Text with EEA relevance)
Date: 2004-10-26
Institutions: European Commission
Subjects: application of EU law, computer systems, economic concentration, merger control, software

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 26 October 2004

declaring a concentration to be compatible with the common market and the functioning of the
EEA Agreement
(Case No COMP/M.3216 — Oracle/PeopleSoft)

(notified under document number C(2004) 4217)

(Only the English text is authentic)

(Text with EEA relevance)

(2005/621/EC)

On 26 October 2004 the Commission adopted a Decision in a merger case under Council Regulation
(EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings (1),
and in particular Article 8(2) of that Regulation. A non-confidential version of the full Decision can be
found in the authentic language of the case and in the working languages of the Commission on the
website of the Directorate-General for Competition, at the following address: http://europa.eu.int/comm/
competition/index_en.html

(1)

(2)

On 14 October 2003 the Commission received a notifi-
cation, pursuant to Article 4 of Regulation (EEC) No
4064/89 (the Merger Regulation), of a proposed concen-
tration by which the undertaking Oracle Corporation
(Oracle, United States) acquires, within the meaning of
Article 3(1)(b) of the Merger Regulation, sole control of
the undertaking PeopleSoft
(PeopleSoft, United
States) by way of a public bid.

Inc.

its likely impact

the concentration and of

the Commission initiated
On 17 November 2003,
proceedings in accordance with Article 6(1)(c) of
the
Merger Regulation. Following a thorough investigation
of
in the
relevant markets for customers, competitors and other
players, on 12 March 2003 the Commission sent its
objections to Oracle, under Article 18 of the Merger
Regulation. According to those objections the transaction
was deemed likely to create a dominant position as a
result of which effective competition in the common
market and in the area covered by the EEA Agreement

(1) OJ L 395, 30.12.1989, p. 1. Regulation as last amended by Regu-

lation (EC) No 1310/97 (OJ L 180, 9.7.1997, p. 1).

(3)

(4)

would be significantly impeded. An oral hearing was held
in Brussels on 31 March and 1 April 2004.

for

further

following the oral hearing,

the
On 7 April 2004,
Commission issued a request
information under
Article 11 of the Merger Regulation inviting Oracle to
submit
to enable the
information in order
Commission to take a decision on a ‘broader factual
basis’.
the
In the absence of a reply from Oracle,
Commission adopted a decision under Article 11(5) of
the Merger Regulation on 14 April 2004 so that the
periods laid down in Articles 10(1) and 10(3) of the
this date.
Merger Regulation were suspended as of
Following Oracle’s
to the
Commission’s request for information, the timetable in
this procedure resumed again on 7 October 2004.

submission in response

The operation was reviewed by the US authorities in
In the US a
parallel with the Commission procedure.
trial has been held in front of the US District Court
for the Northern District of California in San Francisco
(hereinafter referred to as the District Court of Northern
California
the US trial), having
commenced on 7 June 2004. The District Court of

and the

trial

as

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Northern California refused to grant an injunction
regarding the transaction by judgement of 9 September
2004. In the course of the trial, numerous documents
from enterprises concerning the transaction became
public and were (partly) put on the website of the US
Department of Justice. Also transcripts of the statements
made by around 30 witnesses in the trial have become
public. The Commission included parts of the evidence
from the US trial in this decision.

I. THE PARTIES

Oracle is a publicly listed company whose common
stock is traded on the Nasdaq and which is active in
the design, development, manufacture and distribution
of enterprise application software, database and appli-
cation server software and related services.

PeopleSoft is a publicly listed company whose shares are
traded on the Nasdaq and which is active in the design,
development, manufacture and distribution of enterprise
application software and related services. In July 2003,
PeopleSoft acquired control of J.D. Edwards (JD Edwards),
a US company also active in the application software
business.

II. THE TRANSACTION

The notified operation consists of a public bid for all
outstanding shares of PeopleSoft. Oracle launched the
public bid on 9 June 2003. The expiration date of the
offer has often been extended by Oracle. The offer also
includes the outstanding shares which have been issued
by PeopleSoft as a contribution for the acquisition of JD
Edwards. The bid is contested by PeopleSoft and does not
have the support of the Board of Directors of PeopleSoft.

III. THE RELEVANT MARKETS

High-function HR and FMS solutions or software

(9)

(10)

(11)

Oracle and PeopleSoft are vendors of enterprise appli-
cation software (EAS). EAS is software that supports
major business functions needed to manage a business
such as
effectively at a corporate or branch level,
managing corporate finances, automating the sales and
marketing functions of a company, or managing the
resources involved in corporate projects. EAS that
is
commercially available ‘off the shelf’
is referred to as
‘packaged’
from

to distinguish it

in order

software,

customised software that fulfils the same functions as
packaged applications, but
is developed in-house or
with the help of outside consultants.

for

the present

transaction are

The industry generally groups EAS into categories having
functionality with broadly similar purposes. The relevant
categories
financial
management systems (FMS) and human resources (HR),
together often called enterprise resource planning (ERP).
The FMS suite typically includes software for accounting
(accounts receivable, accounts payable, general
ledger),
planning and budgeting, reporting,
time and expense
management and the financial supply chain. The HR
software for personnel data, payroll
suite combines
are
management
customer relationship management
(CRM) and supply
chain management (SCM).

and benefits. Other EAS pillars

The Commission found that the relevant product markets
for the assessment of the present transaction are the
markets for high-function FMS and HR software appli-
cations. As HR and FMS applications are not substi-
tutable for buyers, the Commission considers these as
two distinct markets. The high-function FMS and HR
software applications are intended to serve the needs of
large and complex enterprises
(LCEs) which require
software and accompanying services with a particularly
high standard in terms of, inter alia, scalability, configur-
ability, sophistication, pricing, reliability and quality of
the software and brand recognition of the vendor.

The market investigation showed that characteristics of
high-function HR and FMS software are different from
those of mid-market products. In general, high-function
software solutions are more complex, offer greater func-
tionality, support more users (in total as well as in
concurrent-use numbers), are much more expensive
(from two to five times or more) and have higher imple-
mentation costs compared to mid-market software. High-
function HR and FMS software have a greater breadth of
horizontal functionality and more depth of vertical func-
tionality. High-function software has to support very
high volumes of users (e.g. 30 000 employees simulta-
neously using online employee self-service portals) and
high volumes of transactions and therefore has to have a
very high degree of scalability. Mid-market products
typically have their
limits at several hundreds users.
High-function HR and FMS software can cope with
large companies’ complex organisational designs.
In
carrying out their activity,
large and complex organi-
sations usually involve several departments whereas in
mid-size and small companies functions are carried out
by one/a few persons.

(5)

(6)

(7)

(8)

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(12) High-function HR and FMS software has

to offer
compliance with the legal requirements and accounting
rules of the main economic zones and legal jurisdictions
(e.g. US-GAAP, IAS and other national systems); in this
context, large and complex company solutions will tend
to support multiple regions and different currencies
simultaneously or almost in real-time. At a minimum,
these solutions must provide mechanisms for large enter-
prises to manage these differences with a minimum
large enterprises’ applications must
effort.
simultaneously support multiple languages even within
a single location,
Japanese and
Chinese languages. Mid-market solutions typically have
been optimised for use in a specific economic region,
and as a result typically provide far less language and
geographic support options.

including sometimes

In addition,

(13) A very high level of product maintenance and support
drives LCEs’ choice of EAS products and is an inherent
characteristic of high-function HR and FMS solutions,
compared to mid-market solutions and to the support
needs of a mid-market customer. Complex enterprise
systems must consider the impact of 24-hour/seven-day
coverage required for
the global
company. For mid-market companies, usually a primary
location in the US or Europe is linked to smaller sales
offices or distributors overseas.

the challenges of

(14)

The underlying architecture of high-function solutions is
from the one of mid-market
fundamentally different
products. Often, only a multi-tier
can
achieve the level of throughput that is required from
high-function EAS solutions.

architecture

software

(15) Mid-market solutions normally have simpler interfaces,
or simpler APIs (application programming interfaces),
making them easier to integrate in a simple way with
smaller-scale
other mid-market
solutions, but allowing little scope for adding directly
to the functionality of
the software. High-function
software tends to have complex and proprietary APIs
which allow full and complex integration with other
large scale software solutions and additional functionality
to be added to customise the solutions as well as
supporting multiple popular programming languages.

and other

(16)

investigation further

The Commission’s
showed that
‘best-of-breed’ or point solution software, HR software
system integration services and
outsourcing services,
incumbent software (already installed at customers) do
not represent competitive constraints vis-à-vis a small
but non transitory increase in price of high-function
software, and therefore all
these products/services are
not in the relevant markets.

Large and complex enterprises as customers

(17) High-function HR and FMS solutions are software that is
typically purchased by complex organisations/companies
which have a very high level of functional needs, expect
high standards in product performance and require short
time
accompanying
services.

and continuous

availability of

(18)

The Commission has therefore come to the conclusion
that there are distinct product markets for FMS and HR
high-function solutions for large and complex enter-
prises.

Vendors of high-function HR and FMS software

(19)

The Commission further established who the vendors of
FMS and HR high-function software are. Those suppliers
form the competitive constraints for a combined Oracle/-
PeopleSoft in the markets at stake.

(20)

for

large

The Commission established the suppliers in the market
the bids made by suppliers for such
by looking at
customers,
enterprises
and complex
i.e.
needing complex functionality in the field of HR and
FMS applications. However,
it appears difficult to draw
a clear-cut line between the customers on the basis of the
and therefore between
complexity of
customers of application software which is able to
cater for the needs of such large and complex enterprises
and
for mid-market
customers. In order to be able to carry out its investi-
gation, the Commission used proxies to describe those
customers and the transactions for such software appli-
cations.

their needs

applications

adapted

those

(21) As a first suitable proxy for the ‘complexity’ of
such

organisations,

of

large

the
requirements
the
Commission considered a net licence value of EUR 1
million to be appropriate. This value appeared to be an
appropriate first indication that such bids are made for
high-function solutions purchased by large and complex
enterprises even though it does not mean that bids in
individual cases below this value may not involve high-
function FMS and HR solutions. However, for a licence of
a value in excess of EUR 1 million it can be safely
assumed that
this
threshold for applications in the field of HR and FMS
may be considered as a supplier of high-function FMS
and HR solutions. The Commission further comple-
mented this threshold by a delineation of
large and
complex enterprises as customers. The market investi-
gation showed that thresholds of 10 000 employees or
of revenues exceeding EUR 1 billion might be an appro-
priate proxy for a rough qualification of
large and
complex undertakings. The Commission concludes that
the complementary set of proxies can be used for a first
qualification of the bids to assess whether the bids are for
high-function software for large and complex enterprises.

anyone winning

a bid above

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(22) With the help of these proxies, the Commission analysed
the bids in which EAS vendors participated in 2001 and
2002 as well as the bids submitted by Oracle in response
to the Commission’s information request after the Oral
Hearing. The Commission further analysed documents
relating to bids resulting from the US trial in order to
establish who the suppliers of such software applications
are.

the US trial in San Francisco, the Commission concluded
that, despite limitations in the product offerings of each
of these vendors as opposed to Oracle, PeopleSoft and
SAP regarding HR and FMS high-function software, each
of them has several customers in the field of HR and
FMS which may qualify as large and complex enterprises.
These vendors may be able to serve their needs at least in
the verticals in which the respective vendor specializes.

(26)

(27)

for

and

large

complex

enterprises

(23) On the basis of this evidence, the Commission concluded
that in the markets for high-function FMS and HR for
large and complex enterprises Oracle, PeopleSoft and
SAP are the main players. Each of these players identified
at least 50 to 100 bids within a two-year period falling
under the proxies and therefore concerning high-function
software
(i.e.
companies with more than 10 000 employees and
revenues
the
Commission’s data and the submissions by Oracle
show that occasionally other players win bids for high-
function FMS and HR software to serve the needs of
large and complex enterprises. Other such vendors of
HR and/or FMS high-function software are: Lawson,
Intentia,
IFS, QAD and Microsoft. Although these
vendors won only a limited number of bids, they were
either runner-ups for high-function FMS and HR software
or they participated in bids with a license value exceeding
EUR 1 million in a larger number of bids.

EUR 1 billion). However,

exceeding

to investigate whether

(24) Using Oracle’s dataset containing bid data, as well as two
other datasets obtained from the US trial proceedings, the
Commission further undertook an econometric analysis
in order
the data revealed a
difference in Oracle’s bidding behaviour depending on
the competitors in the final bidding
the identity of
round. A finding that Oracle was relatively more likely
to provide aggressive discounts when either SAP or
PeopleSoft were present
in the final bidding round
rather than when competing against other competitors
would suggest
indirect evidence that competition is
mainly between the big three software providers and
that only Oracle, SAP and PeopleSoft are vendors of
high-function FMS and HR software to serve the needs
of large and complex enterprises. The main finding was
that no significant distinction could be identified between
the behaviour of Oracle when competing against SAP
and PeopleSoft compared to the behaviour against
other bidders. This was
true even when restricting
attention to large deals.

for

and

SAP, Oracle

PeopleSoft. However,

The relevant product markets are therefore, respectively,
high-function FMS and HR solutions
large and
complex enterprises. The main players in these markets
are
the
Commission has come to the conclusion that several
other vendors could represent a competitive constraint
vis-à-vis Oracle, PeopleSoft and SAP at
in the
verticals
in which they are active and cannot be
excluded as vendors from the markets for high-function
FMS and HR applications. For
the
present transaction, Lawson, Intentia, IFS and Microsoft
are to be treated as vendors for FMS and HR high-
function applications and QAD is to be treated only as
vendor for FMS high-function solutions.

the purposes of

least

Mid-market HR and FMS solutions or software

The Commission found indications that the market for
software applications for mid-size enterprises (having
revenues of between EUR 30
approximately annual
million and EUR 1 billion)
is a separate market from
the markets for high-function FMS and HR solutions,
and possibly also from the markets for applications for
small enterprises (i.e. those with revenues below EUR 30
million). Applications adapted to the needs of mid-size
enterprises are usually out-of-the box solutions which
provide a limited scope of functionalities and can only
to a limited extent be configured to the individual needs
of
the enterprise. Separate markets for FMS and HR
solutions can be distinguished also within the mid-
for
market
mid-size
from a
are not
demand side perspective either between themselves, or
with any other functionalities related to other pillars
(CRM, SCM etc.). Furthermore, the Commission found
indications that applications software for small businesses
only cover the basic needs of an enterprise with a
uniform organisational structure.

software as FMS and HR functionalities

substitutable

companies

(25)

The Commission further analysed the capabilities and
reach of
the other
the FMS and HR software of
vendors, Lawson, Intentia, IFS, QAD and Microsoft. Parti-
cularly on the basis of the evidence that has come out of

(28)

In any case, the exact delineation of the product markets
for mid-market HR and FMS solutions and the small
business software can be left open as the transaction
does not lead to competition concerns on the basis of
any of these possible market definitions.

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(29)

Geographic Scope of the relevant markets

The market investigation gave clear indications that the
geographic scope of the markets for high-function HR
and FMS solutions for large and complex enterprises is
world-wide. Most of these customers consider offers for
EAS solutions from vendors located in the EEA,
the
the world without
United States and other parts of
consideration of
the
region where
the geographic
company originates. The Commission also used the
bidding data submitted by Oracle after the oral hearing
to investigate whether Oracle’s behaviour differed
depending on the location of the bid. The data did not
suggest
the average discount offered in the EEA
differed from that offered in the US or in the rest of
the world. The Commission has therefore come to the
conclusion that the markets for high-function HR and
FMS solutions are worldwide in scope.

that

(32) Given their limited meaning for the markets at stake, the
Commission used the shares only as an indication of the
relative strength of the different vendors in the markets.
The shares show that Oracle, PeopleSoft (including JD
Edwards) and SAP are the main players in both the
FMS and the HR market and that the share of other
players may be estimated at between 10 % and 15 %.
SAP would still lead the market over a combined Oracle/
PeopleSoft in FMS whereas a combined Oracle/PeopleSoft
would take the lead in HR.

B. Creation of a dominant position, as a result of
which effective competition will be significantly
impeded

High-function HR and FMS solutions or software

1. N o n - c o o r d i n a t e d e f f e c t s

(30) As regards the mid-market FMS and HR solutions, the
geographic scope of these markets may not be wider
than EEA-wide. However, the exact delimitation can be
left open.

(33)

IV. ASSESSMENT

A. Market Shares

(31)

for

The calculation of market shares has proven to be parti-
cularly difficult
the relevant markets, as neither
publicly available industry studies nor the parties have
provided a segmentation of vendors revenues according
to the segmentation of the market (upmarket and mid-
market) and vendors do not normally classify their
customers according to their volume of
revenue or
their number of employees. Therefore the Commission
sought to establish the strength of the vendors on the
their total revenues as reported in industry
basis of
reports, independently of whether these are achieved in
the upmarket or the mid-market. The shares would be as
in the following table:

In the Statement of Objections the Commission had
based its concerns in part on the finding there would
be a significant group of customers for whom there
would essentially be only one supplier left after the trans-
action. This concern was based on a definition of the
market which after the merger would consist of only
Oracle and SAP. The group with a limited choice after
the merger consist, inter alia, of those customers who do
not find one of the two products suitable for their needs;
those customers who prefer to run their software on a
non-Oracle database (1); those customers who would like
to terminate its relationship with one of the two; those
customers who,
in order to avoid being dependent on
one supplier, would prefer to purchase their FMS and HR
software
and those
customers who would prefer not to license both the
software and the database from the same supplier.

from two different

suppliers

(34)

In light of the conclusions regarding the market defi-
nition, it is not possible for the Commission to uphold
its preliminary conclusion that this group of customers
will be confronted with a de facto absence of choice after
the merger.

Total licences revenues worldwide 2002

Oracle

PeopleSoft

JD Edwards

Oracle/PeopleSoft/JD Edwards combined

SAP

Lawson

Intentia

IFS

QAD

Microsoft MBS

(35)

(%)

HR

13,5

30

2,5

46

40

9

1,5

1

—

2,5

FMS

16

9

3

28

51

4

1,5

0,5

1

14

In order to assess whether or not the notified concen-
the
tration would lead to non-coordinated effects,
Commission ran a number of regressions on each of
four datasets: one data set from PeopleSoft, one Oracle
data set compiled for the European Commission and two
of the Oracle datasets from the US Court proceedings.
The purpose was to investigate to what extent
the
competitive situation of a particular bid (measured by
the number of final round bidders) had an impact on
the discounting offered by the seller in question (i.e.
in
PeopleSoft
Oracle’s datasets).

in PeopleSoft’s dataset

and Oracle

Source: Gartner, ERP Market Experiences Further Decline: Market Statistics,

2002, published 2003.

(1) Oracle’s EAS software only runs on Oracle’s database, while
PeopleSoft and SAP’s software run on other databases besides
Oracle’s.

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(36)

regressions

The Commission generally found that there was a very
strong relationship between the size of the deal and the
discount offered. Deals that tended to produce very high
likely to also attract very large
list prices were overall
in a
discounts. The Commission also found that
number of
relationship
between the deal
size and the discount was not
properly taken into account, there appeared to be an
effect on the competitors on the discounting behaviour.
finding mentioned in the Statement of
The initial
Objections was
indeed based on such a regression.
Once the size of the deal was taken into account, the
number of
final bidders did no longer lead to such
effects.

in which this

(37) A finding, as in this case, that the number and identity of
competitors in a given bid appear not to have an effect
on a firm’s behaviour does not in itself prove that there
will not be harmful effect of the merger on customers.
There may be a variety of reasons why such an effect is
absent from the bidding data. Based on the information
available,
it does not appear possible to reach a final
conclusion about which of the different reasons is the
most pertinent.
the
is not necessary,
Commission to reach a conclusion on this issue since
it is clear that the absence of an appreciable effect of
competition on Oracle’s behaviour makes the bidding
data unsuitable to rely on as determinative proof of an
anticompetitive effect of the merger.

though,

for

It

(38)

(39)

2. C o o r d i n a t e d e f f e c t s

the

further on the finding that,

In the Statement of Objections the Commission had
in
based its concerns
two
addition to the non-coordinated effects,
remaining players would be in a position to further
soften competition by coordinating their competitive
behaviour. The theory of coordination was based on a
definition of the market which after the merger would
consist of only Oracle and SAP and relied in particular
on the symmetrical market shares of a combined Oracle/-
PeopleSoft and SAP and an alignment of
incentives
between them due to the fact that SAP is by far the
largest reseller of Oracle databases. As parameters for
adopting a common policy, the Commission identified
the allocation of customers in a duopoly, a reduction
in price competition and a common understanding to
slow down the addition of further functionalities and
the improvement of products.

it

is not possible

In light of the conclusions regarding the market defi-
nition,
the Commission to
conclude that
the merger would lead to a collective
dominant position of a combined Oracle/PeopleSoft
and SAP on the basis of coordinated effects.

for

(40)

it appears difficult

In a market in which — in addition to Oracle, PeopleSoft
and SAP — Lawson, Intentia, IFS, QAD and Microsoft
are also present as vendors of high-function FMS and HR
applications,
these
to argue that
common understanding as
players would reach a
regards the parameters outlined above. In particular, an
allocation of customers will not be possible due to the
larger group of possible vendors of such software. The
larger number of vendors also reduces the transparency
in the market and would make retaliatory actions more
difficult. Furthermore, the players’ market shares are not
symmetrical. The vendors other than Oracle, PeopleSoft
and SAP are significantly smaller in the relevant markets.
They do not have similar structural
links as SAP and
Oracle in the area of databases. Lawson’s resale of
Oracle databases appears to be marginal compared to
the sale of Oracle’s databases by SAP, while Microsoft
in any case uses its own databases for its ERP products.

(41) Also, the Commission cannot conclude that the merger
will lead to a coordination of only a combined Oracle/
PeopleSoft and SAP. The other vendors mentioned in the
section on market definition — Lawson,
IFS,
QAD and Microsoft — appear to be suitable alternatives
as the Commission’s data and the dataset submitted by
Oracle after the oral hearing (ultimately on 27 September
those vendors have won bids for
2004) show that
software in the relevant markets. A coordination of the
competitive behaviour of a combined Oracle/PeopleSoft
and SAP could therefore not be successfully sustained.

Intentia,

Mid-market HR and FMS solutions or software

Intentia,

(42) As regards HR and FMS mid-market software markets,
significantly more players are active than in the markets
for high-function HR and FMS solutions. Suppliers to
mid-size companies include, Oracle, PeopleSoft, SAP,
Lawson,
IFS, QAD, Microsoft MBS, but also
Sage, SSA Baan, Unit4 Agresso (both FMS and HR);
Hyperion, Systems Union or ‘Sun Systems’ (FMS only);
Kronos, Ultimate, Midland, Meta4 and Rebus (HR only).
No specific market shares for the mid-market appli-
cations are available. Nevertheless, the overall revenues
achieved for 2002 (on the basis of analyst reports)
show that, on a worldwide basis, SAP would remain
the strongest player in such an FMS market, followed
by a combined Oracle/PeopleSoft. Other
significant
players would include Sage, Microsoft MBS, Hyperion,
Systems Union and Lawson.
For HR mid-market
solutions, the combined Oracle and PeopleSoft would
become the strongest player, closely followed by SAP.
Other significant players in HR would include Kronos,
Lawson, Sage and Microsoft MBS.

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(43) On a European level, the impact of the transaction may
give even less reason for concerns on the basis of overall
revenues reported by analysts for 2002 for Europe. SAP’s
position would be stronger
in Europe than on a
worldwide basis in both FMS and HR whereas the
position of a combined Oracle/PeopleSoft would be
weaker. Numerous other vendors represent a competitive
constraint
in a Europe-wide
market as well, both as regards HR and FMS mid-
market software.

to the merging parties

(44) Given the limited strength of a combined Oracle/Peo-
in the markets for HR and FMS applications
pleSoft
by mid-size
adapted
companies and the numerous other players also active
in these markets, it can be excluded that the transaction

typically purchased

to and

would lead to competition concerns in the markets for
mid-market HR and FMS applications, irrespective of the
exact delineation of such markets.

V. CONCLUSION

(45)

The Commission concludes that the proposed concen-
tration would not create or strengthen a single or
collective dominant position in the markets for HR and
FMS high-function solutions and as regards the mid-
market HR and FMS software. Consequently,
the
Commission declares the concentration compatible with
in
the Common Market and the EEA Agreement,
accordance with Articles 2(2) and 8(2) of the Merger
Regulation and Article 57 of the EEA Agreement.