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