Its not just about Oracle Corp. and PeopleSoft Inc. anymore.
During Oracles trial with the U.S Department of Justice to defend its hostile, $7.7 billion takeover bid for PeopleSoft, Oracle is expected to disclose merger talks between rivals SAP AG and Microsoft Corp., according to a statement released today by Microsoft.
The trial starts today in a San Francisco federal District court.
Microsoft said in its statement that it would, in this one instance, depart from its traditional “no comment” stance when it comes to any potential acquisitions. The company confirmed that late last year it approached SAP, of Walldorf, Germany, to discuss the possibility of a merger.
Those talks ended a few months ago, according to Microsoft, when it became clear that a merger between SAP and Microsoft would be too complicated—both in terms of the transaction itself, and the integration of the two companies.
There are no intentions to resume the merger talks, according to Microsoft, of Redmond, Wash., but the conversations did lead to a deeper relationship between Microsoft and SAP.
During its annual Sapphire conference in New Orleans last month, SAP announced the fruits of its merger discussions with Microsoft.
During SAP CEO Henning Kagermanns keynote address, the company played a video in which Bill Gates detailed a roadmap for deeper integration between Microsofts .Net and SAPs NetWeaver integration platforms.
Essentially, the two companies agreed to jointly develop software that would enable SAP developers to utilize Microsofts Visual Studio .Net environment—a move that will increase access to both .Net and NetWeaver functionality.
Microsoft and SAP announced several deliverables, including a beta program that will begin this summer that enables ASP .NET developers to customize and extend SAP applications, and version 2.0 of SAPs .Net Connector, due in August, which will include better language support for Visual Basic .Net and better integration with Visual Studio .Net.
A merger conversation between both companies may be a key point in Oracles defense against the Justice Department.
SAP is the No. 1 enterprise resource planning software developer, with over 20,000 customers. It provides software to some of the worlds biggest companies in a number of different verticals and, over the past couple of years, has been working hard to reach small and mid-market customers.
Microsoft has also been building out its SMB applications division over the past two years, starting with the multibillion-dollar acquisitions of Great Plains and Navision software development companies. However, Microsoft does not provide applications to enterprise customers.
During the trial between the Justice Department and Oracle, the Justice Department will attempt to block Oracles merger with PeopleSoft by showing that the combination would be harmful to competition in the upper tier of the ERP (enterprise resource planning) software market, which is comprised of SAP, Oracle and PeopleSoft.
Oracle will defend the proposed acquisition by attempting to prove that the competitive playing field is much larger and includes Microsoft and a host of other applications providers.
Both the Justice Department and Oracle will call Microsoft officials to the stand to substantiate their point of view. Oracle will point to longtime rival Microsoft as a welcome competitor in the enterprise market, while the Justice Department will suggest that Microsoft has no intentions of entering the “upmarket” for at least two years—the time frame set forth by antitrust guidelines.
The twist with Microsoft is that while officials have steadfastly denied any intention to enter the ERP market in the near future, its considered a well-known secret that the company is indeed headed in that direction.
Even the hint of a merger discussion between Microsoft and SAP—particularly initiated by Microsoft—is a good indication that the company has its sights set on larger applications markets.
“SAP, like all publicly held corporations, routinely evaluates potential opportunities to strengthen its leading position in the enterprise software market, and the disclosure made today should be interpreted that way,” said Henning Kagermann in a statement.
Robert Christopher, an antitrust attorney and head of litigation for Northern California with Coudert Brothers LLP, said most companies walk a fine line between their right to have private, preliminary merger discussions and their responsibility to inform shareholders of whats going on with any negotiations.
“These are tough situations for companies,” said Christopher, in Palo Alto, Calif. “They will often explore ideas privately. If theyre public, at a certain point in time they have an obligation to disclose whats going on. But if its preliminary, they do not have the obligation to disclose, so its a tough call.”
Christopher did say that todays revelations about pre-merger talks between Microsoft and SAP may not bode well for Oracle.
“My gut reaction is this would work in favor of the antitrust division,” said Christopher. “Part of Oracles argument is there are companies such as Microsoft who might prevent in the future continued market consolidation. If Microsoft should acquire SAP that would further threaten an increased consolidation of market power because it would eliminate one of the competitors in that space.”
Rather than pointing to SAP being on the market, or Microsoft looking to acquire more ERP providers, Gartner Group analyst Jeff Comport said the discussions between Microsoft and SAP show that “both vendors clearly recognize the importance of a broad stack—infrastructure, middleware and up through applications,” said Comport, in Stamford, Conn. “Combining the companies would be one way to compete against Oracle and IBM.”
Comport pointed out that Microsoft so far has followed an incremental strategy when it comes to acquiring applications businesses in order to build its enterprise capacity step-by-step, and at the same time rely a great deal on internal development.
Comport all but rules out a similar acquisition by Microsoft.
“Anything that would be on the large scale of SAP—there are few [options],” said Comport. “But clearly, SAP didnt go anywhere. With the amount of IBM in [SAPs] install base, and the amount of Oracle in the install base, in a market where Microsoft wants to forward its own stack—[it] is not a good idea.”
Editors Note: This story was updated to include comments from Robert Christopher and Jeff Comport.