The Legal Infrastructure of Business

Spat Between DOJ and the EU over Oracle-Sun Merger

The deal and the disagreement between DOJ and the EC

On Monday November 9th, the European Commission (EC) officially objected to the Oracle-Sun deal, mainly out of concerns over Sun’s MySQL database, saying the deal would be anti-competitive in the database market. Oracle’s proposed $7.4 billion purchase of Sun Microsystems Inc. was cleared by the Department of Justice (DOJ) in August.

Within hours of EC’s decision, DOJ blasted out a press release saying that the Justice Department talked to industry players and examined internal company documents before concluding that the merger was “not likely to be anticompetitive”. Oracle also lashed back at the EC, stating that the decision reveals a “profound misunderstanding of both database competition and open source dynamics”.

The dispute continued on Tuesday with the EU rebuffing Oracle’s criticism as “facile and superficial”. On Wednesday, the EU’s Competition Commissioner Neelie Kroes told Dow Jones it was unusual for the DOJ to comment on a pending EU investigation, “It isn’t normal [practice] to publish a statement from colleagues in Washington.”

EU sees major antitrust issues with a takeover

Oracle is the world’s largest proprietary database company and MySQL is the world's leading open-source database provider. The EC is worried about maintaining customer choice and preventing higher prices which could potentially result from the takeover. The merger would make Oracle the exclusive holder of the copyright and trademark for MySQL code, possibly reducing competition among rivals who use the code.

A few arguments

Having worked with both databases for years I disagree with the EC’s objections. First, these two databases are very different products that cater to different markets. Oracle databases are more used to manage complex back-office functions such as accounting and payroll processing at the largest companies. MySQL is often used to power large-scale Web sites with many servers such as Google and Facebook.

Secondly, the very nature of open-source makes it impossible for Oracle to stifle MySQL’s further development. MySQL is under GPL terms and can be branched off even if Oracle stops funding it. Given its massive influence on the database market, the users can exert more power on MySQL’s future evolution than the owner. Third, it would be an extremely poor business decision on Oracle’s side to not improve MySQL. Oracle, as one of the most successful businesses in the world, will not risk enraging the IT community worldwide. As a matter of fact, Oracle already owns InnoDB - the database engine used by MySQL, and has been increasing its investment making MySQL a stronger player in the market since 2005.

Lastly, the most valuable assets of Sun include its Solaris operating system and the SPARC hardware. MySQL is only a minor part of the transaction. Oracle’s purchase of Sun will inject more competition into the higher end server market with major players such as HP, IBM and Microsoft.

Trans-Atlantic Rift reopened?

The first time a proposed merger between two U.S. companies was blocked solely by European regulators was in 2001 when the EU rejected GE’s planned $42 billion acquisition of Honeywell. Ever since, the relationship between the DOJ and the EC has soured. Further clashes happened in 2004 when the EU ruled Microsoft “an abusive monopolist” and ordered a record fine ($613 million). The ruling was criticized by DOJ as “chilling innovation and discouraging competition.”

In recent years, EU and U.S. antitrust authorities have had more amicable ties. Obama’s administration has pledged to work more closely with their European counterparts, stressing the need for cooperation. By objecting to the Oracle-Sun deal, the EC could strain the regulatory relationship with the US.

The final verdict

The EC has scheduled November 25 for Oracle to argue its case before regulators. The EC is due to make a final ruling by Jan. 19. In the mean time, Sun’s business has been hurt by the delays, with its recent quarterly earnings dropping 25% from a year previous.

At this moment, the outcome is hard to predict. The EC’s objections should not be interpreted as final rejection. One possibility to clear the transaction is the divestiture of MySQL but Oracle has refused to separate it out of the deal. As the value of Sun’s stock keeps falling, Oracle may decide to walk away from the deal, which will only hurt Sun’s sales further.

“Given the lack of any credible theory or evidence of competitive harm, we are confident we will ultimately obtain unconditional clearance of the transaction,” vows Oracle.

I certainly hope that the companies and the EC will “reach a speedy resolution that benefits consumers in the Commission’s jurisdiction.” as put in the DOJ’s statement.

The EC’s objections: http://online.wsj.com/article/SB10001424052748703808904574526072224895160.html

DOJ’s statement on Oracle-Sun:http://blogs.wsj.com/digits/2009/11/09/dojs-statement-on-oracle-sun/

Executive Compensation - Are CEOs Overpaid?

The worst recession in decades didn’t hurt the compensation packages of CEOs in the US in 2008.

 

The total compensation awarded the CEO of Abercrombie, Michael Jeffries, was $71.8 million last year, which included a base salary of $1.5 million, a $6 million “stay bonus” as an incentive to keep him on board despite his 17-year tenure, in addition to stock options and perks such as the use of a corporate jet.

 

Michael Jefferies is not alone. Eugene Isenberg, the CEO of Nabors Industries, an oil and gas drilling company, received a realized income of $79.3 million in 2008, according to the Corporate Library, a corporate governance research firm.

 

These two were among the five CEOs named as “the Highest Paid Worst Performers” of 2008. For a CEO to make the list, he had to make at least $30 million last year, and the share price of the his company has underperformed rivals and the broad sampling of stocks in the S&P 500 over the last five years:

 

· 5 Most Overpaid CEOs

http://money.cnn.com/galleries/2009/news/0909/gallery.highest_paid_worst_CEOs/index.html

 

The #1 on Associate Press’s Top 10 list of highest-paid CEOs in 2008 is Aubrey McClendon from Chesapeake Energy Corp., with a total compensation of $112.5 million. Assuming a 70 hour work week, it translates into ~ $31,000 per hour. Not bad at all.

 

· AP’s Top 10 Highest-Paid CEOs in 2008

http://www.huffingtonpost.com/2009/05/02/highestpaid-ceos-for-2008_n_195183.html

 

These are mind-boggling numbers! According to Business Week, the average CEO of a major corporation in the US made 42 times as much as an average worker in 1980. By 1990 that had doubled to 85 times. In 2000, that had soared to an incredulous 531 times! The wage gap has been ever widening at an accelerated speed.

 

What has contributed to this dramatic rise of CEO compensation? And is it justified, in other words, are CEOs overpaid?

 

Defenders of high executive pay argue that the increase in executive pay is a mere byproduct of supply and demand for executive talent - the global war for talent and the rise of private equity firms can explain much of the increase. But are these defenders assuming a global talent supply shortage? Have the top tier MBA programs around the globe failed to supply executive talent to offset, if not overcome, the demand? Do executive compensation figures reflect a failed market, rather an efficient one?

 

Public outrage over soaring CEO pay has been growing for years. To many shareholders and taxpayers, one extremely upsetting aspect of the excessive compensation is CEOs are getting huge awards regardless of the performance of the companies they oversee. In 2008 shares of Abercrombie plummeted 71% and Nabors Industries’ stock fell 51%, neither of which prevented their CEOs from pocketing high tens of millions into their pockets.

 

If there have been fairness and justice issues, what should be done? How much is not too much? Should there be a Draconian remedy – a cap on all publicly traded companies? What will be the government’s role in corporate pay practices?

 

Earlier this year, responding to outrage about huge bonuses being paid to AIG, who received billons of TARP money, Congress amended the bailout law to require that executive compensation at companies getting exceptional assistance be curbed. As discussed in class, Kenneth Feinberg, the White House’s “Pay Czar” has mandated compensation limits for the top 25 officials in each of the seven companies that received billions of TARP money - average total compensation for 2009 is expected to be halved. Meanwhile, the Federal Reserve issued a proposal on October 22 that for the first time would police banks' pay policies to ensure they don't encourage employees to take reckless gambles like those that contributed to the financial crisis. Federal Reserve Chairman Ben S. Bernanke said. "The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system."

 

The effect of these dual steps taken by Fed’s will be far-reaching. Nearly 6,000 banks will be closely scrutinized for compensation policies to curb risky practices. We have yet to see how Fed’s action balances the public anger over high executive pay with the much intensified need to keep too much top talent from leaving.

 

Not surprisingly, there has also been an explosion in academic research on executive compensation. There was an interesting study by a chemical engineer at Purdue University on what is fair pay for executives. His work was published on November 3rd in the online open-access journal Entropy. The researcher, Venkat Venkatasubramanian, devised a new way to calculate the true worth of top CEOs based on equations found in chemical engineering. His findings are pay for an average S&P 500 CEO should ideally be in the range of 8 to 16 times the lowest employee salary, but chief executives in 35 of the top Fortune 500 companies were overpaid by about 129 times their "ideal salaries" in 2008.

 

· Statistical Thermodynamics to Calculate Ideal CEO Pay

http://www.cbc.ca/consumer/story/2009/11/04/consumer-ceo-pay.html

 

From a global perspective, the high pay ratio found in US is not typical in other parts of the developed world. Per Business week, average CEO pay ratios were about 11:1 in Japan, 15:1 in France, and 20:1 in Canada and 22:1 in Britain in 2006. Thus, US executives make substantially more than their European and Asian counterparts. How do we explain these differences – are European and Asian markets not as efficient or more efficient? Or the talent shortage has not been as pronounced in those countries?