Microsoft admits to merger discussions with SAP

8 Jun 2004

Microsoft has admitted that it held merger talks with the German business software giant SAP last year. But while such a combined company would have dominated the enterprise software market, too many obstacles lay in its way, a leading analyst firm has said.

The surprising disclosure came yesterday because Microsoft expected the news to emerge later this week as part of the US Justice Department’s lawsuit to block Oracle’s proposed takeover of PeopleSoft.

Breaking with its usual policy of not commenting on mergers or acquisition talks, Microsoft admitted that exploratory discussions had taken place. In a statement, the world’s largest software company added: “A few months ago, Microsoft ended these discussions due to the complexity of the potential transaction and subsequent integration. There are no intentions to resume these talks.”

It is believed that Oracle intended to disclose this news in court to support its assertion that its purchase of PeopleSoft would be an attempt to stave off a bigger rival, ie Microsoft.

Had the Microosft-SAP deal gone through, it would have been a bombshell, said Philip Carnelley, research director at the analyst firm Ovum. “The one big software area where Microsoft doesn’t dominate is business applications – cutting it off from about a third of the market – which is why it is already spending billions to build a position in business applications,” he said in a briefing note.

Carnelley pointed out that Microsoft currently spends three dollars for every dollar its Business Solutions division garners in revenues. A move for SAP would have sprung it to dominance overnight. “A joint Microsoft-SAP would have absolutely dominated software spending by large enterprises. However the obstacles – technical, organisational and cultural – would have been formidable. We wonder what the regulators would have made of this, too. We’re not surprised it soon became clear the idea was a non-starter.”

A cash-rich company, Microsoft can afford to buy whoever it wants, even a company valued at close to US$50bn such as SAP.

Carnelley said that in order to keep growing ahead of the market Microsoft needs new ideas and its move for SAP certainly qualified as one. He added that Oracle would use this information to try to bolster its argument that the industry will continue to consolidate as it matures and growth necessarily slows. As part of this, Oracle would argue that it needs additional scale to continue to compete.

He observed that Oracle also argued that the US Department of Justice has defined the market for enterprise business applications too narrowly and that its competition is wider than just SAP and PeopleSoft; indeed, it includes Microsoft already. Carnelley said this seems slightly contradictory. “Overall this says more about Microsoft’s intentions and also the need for regulators to get a grip on the software industry.”

He concluded: “Even if Microsoft doesn’t make a big acquisition in this space, is it fair that it can invest billions in building a new business stream out of the proceeds of its near-monopolies in other areas of software? Can it – or other giants like Oracle – continue to acquire companies in complementary but adjacent markets? As the industry consolidates such questions will reappear with increasing frequency.”

By Gordon Smith