Microsoft and SAP said they initiated merger
discussions late last year, but the talks ended several months ago
after Microsoft decided the deal and the post-union integration
would be too risky.
The two companies disclosed their talks yesterday as trial
commenced on the US Department of Justice's lawsuit to block
Oracle's proposed acquisition of PeopleSoft.
The DOJ argues that a PeopleSoft/Oracle combination would
adversely consolidate the high-end ERP market, which the DOJ sees
as including only SAP, PeopleSoft and Oracle.
Oracle's counter-argument is that the ERP market is a highly
fragmented one, in which the industry's leaders are under constant
pressure from new entrants such as Microsoft.
Microsoft and SAP traditionally do not disclose information
about merger or acquisition discussions. The companies said they
chose to comment this time because of the likelihood news of their
discussions would emerge during the DOJ/Oracle trial, which is
taking place in San Francisco. Both sides plan to call Microsoft
executives as witnesses.
SAP and Microsoft said they have no intention of reviving their
merger talks.
Both sides cast Microsoft as the suitor. SAP said Microsoft
raised the idea of a merger during discussions about a joint
development partnership around web services. While idea of
combining the two companies fell apart, the joint-development talks
led to an agreement on plans for interoperability between
Microsoft's .net platform and SAP's NetWeaver. That agreement was
announced last month.
Microsoft began edging into the ERP market several years ago by
purchasing Great Plains Software and Navision, which it has
combined to form a unit called Microsoft Business Solutions
(MBS).
For now, that group focuses on selling to small- and
medium-sized businesses. SAP targets smaller companies, but the
bulk of its business is from large organisations buying complex
systems for accounting, sales and human resources management.
Gartner research director Yvonne Genovese said that the news
Microsoft considered buying SAP came as no surprise considering the
stalled state of the company's own MBS group.
At a Gartner conference in March, Microsoft chairman and chief
software architect Bill Gates responded to a question about the
enterprise software market's future with positive comments about
SAP's prospects - and without a word about MBS, Genovese said.
"It was clear that there was something there that was going
on."
Genovese believed the companies' customers are better off with
the arrangement now in place, with the suppliers remaining
independent but pledging co-operation. A merger would have faced
intense antitrust scrutiny from the DOJ, she said, and been fraught
with problems as Microsoft attained the leadership position in a
market it is still struggling to understand.
Microsoft's announcement last week that chief executive officer
Steve Ballmer will oversee MBS marked the first time since the
group's creation that Microsoft has treated MBS as a core part of
its overall corporate strategy, Genovese said.
"Enterprise applications is a very different type of business
than Microsoft has been in in the past. It's a services
environment. You have to go in and understand the business model of
the customer. Microsoft has always had a one-step-removed
model."
With more than $56bn in cash on hand at the end of its last
quarter, Microsoft has faced pressure from investors to buy its way
into higher-growth markets. In the first nine months of Microsoft's
2004 fiscal year, which ends on 30 June, Microsoft generated
revenue of $27.5bn, but just $471m came from its MBS group.
Stacy Cowley writes for IDG News
Service