Oracle: spreading rumors
Questionable revenue recorded
Oracle claims the way PeopleSoft accounted for some software revenue recorded in the third quarter may be questionable, due to the controversial Customer Assurance Program refund offer PeopleSoft had in place. Oracle could benefit from any uncertainty generated, but probably only if the SEC became involved.
During a conference call, Oracle CFO Jeff Henley said he believed PeopleSoft had a revenue recognition problem. He claimed that certain CAP terms in contracts may have created liabilities that would prevent revenue being immediately recorded.
The CAP offers PeopleSoft buyers a refund of between two and five times their license fee if PeopleSoft is acquired and there's a subsequent reduction in product support. CAP has been offered in three quarters, including this one, but with different terms in each.
In Q3, the CAP was apparently changed to include a board coup as an acquisition event that could set the ball rolling for possible refunds. According to Oracle, this created potential liability for PeopleSoft itself, rather than an acquirer.
"Since the revised plan can be triggered without an acquisition, the contingent obligation under the customer refund program could be an obligation of PeopleSoft," Mr Henley said. "You should not book revenue until that refund or cancellation right terminates."
Mr Henley argued that under American Institute of Certified Public Accountants accounting rule SOP 97-2, which deals with software revenue reporting, it's possible some revenue should not have been recorded until after the CAP terms in contracts had expired. A PeopleSoft spokesperson said the company was confident that all its revenue was recognized appropriately.
Oracle, naturally, could stand to benefit from any fear, uncertainty and doubt accompanying accounting uncertainty at PeopleSoft. If PeopleSoft suffered these problems, its share price could be reduced, making a takeover easier. But it is likely the SEC would have to become involved before Oracle's claims started being taken seriously.
PeopleSoft's market capitalization is currently above what Oracle is offering, and Oracle, if anything, is talking about PeopleSoft being worth even less due to the liabilities CAP refunds could impose on an acquiring company.