The Department of Justice has filed suit to block Oracle's $9.4 billion hostile offer for PeopleSoft because it says it would result in higher prices, less innovation and fewer choices.

The DOJ's not alone either. The attorneys general of Hawaii, Maryland, Massachusetts, Minnesota, New York, North Dakota and Texas have joined the civil antitrust suit, which was lodged in federal court in San Francisco late Thursday.

The DOJ's move is a major, if not fatal, setback for Oracle, which continues to maintain that the acquisition is not anticompetitive.

Oracle's board met in an emergency session Thursday and sent out a message saying Oracle would challenge the decision, a position it's been expected to take even if it's not expected to succeed.

Blasting the DOJ's decision, Oracle attributed it to aggressive lobbying by PeopleSoft management.

"It is inconsistent with the overwhelming evidence of intense competition in the markets we serve, and we believe it is without basis in fact or in law," Oracle said in an earlier canned statement.

But according to the DOJ's antitrust chief R Hewitt Pate, "This transaction is anticompetitive pure and simple. Under any traditional merger analysis this deal substantially lessens competition in an important market."

Pate claimed that blocking the deal would protect business and government agencies that rely on competition to get the best value for their dollar. "This lawsuit seeks to ensure that there will continue to be vigorous competition in this important industry," he said.

Oracle's first canned statement said it would continue to solicit proxies to unseat the PeopleSoft board and substitute its own people at the PeopleSoft stockholders meeting on March 25, suggesting that it meant to fight the DOJ. Subsequently it said it won't try that and would withdraw its slate of alternate directors.

Even if it had the DOJ's sanction and the European Commission's, Oracle would still need to disarm PeopleSoft's poison pill.

PeopleSoft of course was pleased as punch with the DOJ's decision. "Now that the antitrust day of reckoning has arrived and the Justice Department has announced its decision to sue to block the transaction, it is time for Oracle to abandon its efforts to acquire the company," CEO Craig Conway said.

PeopleSoft management has claimed from the beginning that Oracle's machinations are only meant to disrupt the company.

PeopleSoft's board has repeatedly rejected Oracle's offers and has recommended that shareholders not tender their shares. "Don't underestimate the significant additional value PeopleSoft can create once the disruption from Oracle's hostile activities has ended," Conway said on February 9.

Oracle is third in the market, PeopleSoft second and SAP first and leagues ahead of even an Oracle-PeopleSoft combine.

The DOJ's position is no surprise since its staff made a preliminary recommendation a couple of weeks ago that the proposed acquisition be blocked.

Oracle subsequently claimed that the Justice Department was applying unusual criteria and defining each customer for the financial reporting and HR software that PeopleSoft, Oracle and SAP as a freestanding market for antitrust purposes, according to unidentified sources quoted by the Wall Street Journal. Naturally, the narrower the market, the easier it is to find that an acquisition is anticompetitive.

"We were stunned by the unprecedented new theory." Oracle co-president Safra Catz told the Journal. Catz led the team trying to defuse the DOJ's position. Oracle wants all the companies it considers competitors to count like Microsoft, which is becoming more of a factor in the market.

However, it appears that the DOJ abandoned any novel theories and limited the field to only three players, which Oracle claims "does not fit with the reality of the highly competitive, dynamic and rapidly changing market." It says a combined company will be able to offer products and servers at lower prices.

The Justice Department, in an ironic moment in its suit, quotes former Morgan Stanley analyst Chuck Phillips, now Oracle's recently ordained co-president, as telling Morgan Stanley clients two years ago that the market consisted of only three companies, calling them an "oligopoly."

Meanwhile, Oracle has extended its tender offer to June 25, more than a year after it first went after PeopleSoft.

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