Whats Behind the Retek Battle?

As Oracle and SAP engage in their half-billion battle for who will takeover retail software vendor Retek, the most obvious reasons for the fight are not the true ones.

The biggest news this month in retail has been the battle between $9 billion SAP and $3 billion Oracle to take over retail software vendor Retek, which had barely $174 million in revenue last year and less than $7.7 million of profit. But that’s pretty good compared with the prior year, when it lost a little more than $20 million.

So how much are SAP and Oracle offering?

SAP started the bidding at $496 million and Oracle tapped it slightly with a $525 million offer. SAP has yet to announce if it will counter.

What do SAP and Oracle see in Retek? Quite a bit. It goes beyond that retail is a huge space with a very aggressive growth curve projected for the next decade.

Yes, it’s true that Retek has an impressive list of marquee clients, including Abercrombie & Fitch Co., Nordstrom Inc., Hallmark, A&P, Best Buy, The Kroger Co., RadioShack Corp., Eckerd Corp., Tesco, Zale Corp., Sears Canada Inc., Gap Inc. and Kohls Corp. But that’s not all that there is to Retek’s allure.

/zimages/1/28571.gifThose tier-one list of major retailers is only one reason for the battle: Oracle has integration plans. To read more, click here.

Any look at why Retek is attractive needs to start with why Retek is seen as likely to avoid the almost cliché-d downfall of most mergers, such as HP-Compaq, AT&T-NCR, AOL-Time-Warner and Netscape-AOL. eWEEK.com has been reporting recently about some of the integration problems of the AT&T Wireless-Cingular merger as well as Sears-Kmart.

Mergers of so-called equals have a huge hurdle in front of them because someone needs to be seen throughout the company as the acquirer. When multi-billion players like Oracle and SAP are involved in a much smaller player such as Retek, that issue shouldn’t be a problem.

Another key historic technology merger problem is the loss of momentum during a transition that can last a year or more, which is a golden window of opportunity for rivals to steal nervous customers. IBM’s legendary FUD campaigns (fear, uncertainty and doubt) were tailor-made for that “right-after-acquisition” phase when corporate IT executives get the most nervous.

That loss of momentum happens when there is a big question about product direction and/or strategy and—as is the case today with AT&T Wireless and Cingular—difficulty integrating the technology to form the cohesive whole that was sold to shareholders.

That’s the heart of the argument for the analysts who believe that an Oracle takeover of Retek would be far less disruptive than would an SAP takeover.

That addresses why a Retek acquisition might not be bad. But why do SAP and Oracle think it would be so good? Much of that answer comes from looking at Retek’s revenue stream.

/zimages/1/28571.gifRetail technology is changing as the e-commerce world changes online and physical storefronts. How much of a change? To find out, please click here.

For a company that has held a strong favorable reputation within U.S. retail for years and has amassed such an impressive link of major retail clients, why is their revenue so relatively small?

From one perspective, their plight is not that different from the hypothetical car company that makes the ideal automobile, which lasts for 50 years and never needs maintenance nor fuel. The company makes a killing its first two years, but then revenues quickly plummet. After it has sold to most of the prospects who could afford such a vehicle, it’s business model provides no recurring revenue from its customers and it goes bankrupt.

This is not to suggest that Retek’s products approach perfection. Indeed, Retek received some unwelcome publicity just last month when Retek systems sold to Coles Myer and Britain’s Sainsbury chain developed problems. Sainsbury even claimed that it needed to take a $700 million writedown from IT last October and placed some of the blame on Retek.

But the very nature of the large merchandise planning and merchandise operations management systems—coupled with the investment-averse nature of retailers in general—means that Retek’s cashflow much more closely resembles that fictitious 50-year car than the once-or-twice-a-year upgrade licensing fee structure that Oracle, SAP and the likes of Microsoft have gotten used to.

Next Page: IT Investments: Retail Style.