On September 9, 2004, the United States District Court for the Northern District of California rejected, in a rare defeat for the Antitrust Division, the government's challenge of the tender offer by Oracle Corporation to acquire PeopleSoft, Inc., a major rival to Oracle in the development and licensing of Enterprise Resource Planning ("ERP") software. In its decision in favor of Oracle's bid, the District Court concluded that the government had failed to demonstrate that the Oracle/PeopleSoft combination was likely to substantially lessen competition in a relevant product and geographic market in violation of Section 7 of the Clayton Act. According to the Court, the government had failed to (1) establish that a post-merger Oracle would have sufficient market shares, in properly defined product and geographic markets, to apply the burden-shifting presumptions of anticompetitive effects as set forth in U.S. v. Philadelphia National Bank, 374 U.S. 321 (1963), (2) demonstrate a likelihood of substantial anticompetitive effects under a theory of coordinated effects, or (3) demonstrate a likelihood of substantial anticompetitive effects under a theory of unilateral effects. Moreover, the Court explicitly rejected, as unfounded, several important principles of the DOJ/FTC merger guidelines and, equally significant, refused to accord any substantial weight to evidence of customer concerns about the impact of the merger.
Market Definition
Perhaps most determinative of the Court's ruling in favor of Oracle was its rejection of the government's definition of the product market to include only the "high function" financial and human resource software sold by Oracle, PeopleSoft, and SAP AG. Significantly, such software was considered by the Court to be differentiated products, i.e., not perfect substitutes for one another due to the customization and configuration involved. In addition, the Court determined that the government's proposed market . including only software manufactured by Oracle, PeopleSoft and SAP - was inappropriate as it improperly excluded viable alternatives to the Oracle, PeopleSoft, and SAP products, such as outsourcing, enterprise software solutions by mid-market vendors like Lawson and AMS, best-of-breed solutions targeted at specific business functions, and prospective products from nascent market entrant, Microsoft. The Court also rejected the government's attempt to confine the relevant geographic market to the United States and instead concluded that the relevant market was a worldwide market. Broadening the relevant market in this fashion dramatically reduced, in the Court's view, the competitive significance of the transaction.
Unilateral Effects Analysis
A critical part of the Court's decision is its "unilateral effects" analysis. A claim that a merger is anticompetitive because of so-called unilateral effects is premised on the assumption that the horizontal merger would lead to increased prices because it eliminates direct competition between the two merging firms, even if all other firms in the market continue to compete independently. As fashioned by the Court, the following four factors make up a differentiated products unilateral effects claim: (1) the products controlled by the merging firms must be differentiated (i.e., not perfect substitutes); (2) the products controlled by the merging firms must be close substitutes such that the customers of one of the merging firms would turn to the other in response to a price increase; (3) other products must be sufficiently different from the products of the merging firms such that a small, but significant and non-transitory, price increase would be profitable to the merging firms; and (4) repositioning by the non-merging firms, so as to eliminate market power created by the merger, must be unlikely.
Addressing the unilateral effects claims, the Court first looked to the analysis set forth in Philadelphia National Bank and the Horizontal Merger Guidelines to determine whether the government was entitled to a presumption that the merger would violate Section 7 of the Clayton Act. Pursuant to the analysis by the Supreme Court in Philadelphia National Bank, "a postmerger market share of 30 percent or higher unquestionably gives rise to the presumption of illegality". Similarly, under the Horizontal Merger Guidelines, "anticompetitive effects are presumed where the market concentration data fall outside the safe harbor regions of Section 1.5, the merging firms have a combined share of at least 35%, and where data on product attributes and relative product appeal show that a significant share of purchasers of one merging firm's product regard the other as their second choice, unless rival sellers likely would replace any localized competition lost through the merger by repositioning their product lines."
Notwithstanding the holding in Philadelphia National Bank, the Court cautioned against the application of a presumption of anticompetitive effects to a differentiated products unilateral effects case and rejected, as unwarranted, the 35% figure employed by the Horizontal Merger Guidelines. In this regard, the Court acknowledged both the importance and difficulty of properly identifying the market boundaries in a differentiated products case, noting the subtleties of differentiated products markets, including the "many non-price dimensions in which sellers in such markets compete". For the Court, "a strong presumption of anticompetitive effects based on market concentration is especially problematic in a differentiated products unilateral effects context". Due to the difficulty in defining the market in a differentiated products case, the Court criticized the Guidelines. focus on market concentration and noted that:
A presumption of anticompetitive effects from a combined share of 35% in a differentiated products market is unwarranted. Indeed, the opposite is likely true. To prevail on a differentiated products unilateral effects claim, a plaintiff must prove a relevant market in which the merging parties would have essentially a monopoly or dominant position....
The Court concluded that the government did not demonstrate that a post-merger Oracle would have sufficient market shares in the product and geographic markets, properly defined, to apply the burden-shifting presumptions of Philadelphia National Bank. Specifically, the Court pointed to the government's failure in proving a relevant product and geographic market. In the absence of evidence of a relevant product and geographic market, as well as proof of market shares in the correctly defined product and geographic markets, the Court could not conduct burden-shifting analysis under Philadelphia National Bank or employ the concentration methodology of the Horizontal Merger Guidelines.
Without the benefits of presumptions as to anticompetitive effect, the Court further declined to find actual anticompetitive effects under a unilateral effects theory. On the basis of the evidence and testimony, the Court concluded that the government had failed to prove that there was an area of localized competition between Oracle and PeopleSoft . i.e., that there were a significant number of customers who regarded Oracle and PeopleSoft as their first and second choice. Moreover, the Court interpreted much of the government's expert and customer testimony to illustrate that, although there were areas of intense competition between Oracle and PeopleSoft, such competition did not occur in a product space where SAP (and presumably others) were excluded. In a surprising rejection of significant customer testimony regarding product market definition and anticipated competitive effects . a form of evidence routinely relied upon by DOJ and FTC to identify and challenge anticompetitive mergers .- the Court discounted this testimony as "mere preferences" and as reflecting "unsubstantiated consumer apprehensions."
Conclusion
While the Oracle/PeopleSoft merger decision is highly fact sensitive (particularly given the Court's merits trial on the Government's claim), it is significant that the Court concluded that the government had not only failed to prove its case as alleged, but also, perhaps more importantly, that the government's reliance on bright-line market share presumptions and unconfirmed customer concerns were inappropriate.
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