Microsoft, SAP Considered Mega Merger

by Alex Woodie

Microsoft approached SAP late last year to explore the idea of a merger of the two companies, but ended talks permanently this spring, the companies revealed this week. Had the two giants of the software business merged, everyone else in the business would have been facing down an extremely formidable adversary. But, thankfully for competitors of the two companies, Microsoft called off merger talks due to "the complexity of the potential transaction and subsequent integration."

SAP and Microsoft made statements Monday that simultaneously revealed the existence of the talks and the abrupt cessation of them. The two announcements were a preemptive strike against the disclosure of the information, which they expected to occur during the Department of Justice's lawsuit to block Oracle's hostile takeover bid for rival PeopleSoft. The information was uncovered during the pretrial discovery phase of the government's case against Oracle, Microsoft and SAP said. The trial began this week.

In its statement, Microsoft said Oracle would have used the existence of the merger talks as part of its defense. Oracle and the government are at odds over the breadth of the market for human resources and financial applications for the world's largest corporations. The government is expected to make the case that the market is served by only three companies--SAP, Oracle, and PeopleSoft--and therefore any consolidation among those players would be detrimental to competition. Oracle, on the other hand, maintains that the market is much broader than that, and is served by several other vendors, including Geac, Lawson Software, and SSA Global, which are all among the top 10 global ERP vendors.

A merger between Microsoft--already the world's largest software company, with $32.2 billion in revenues for fiscal 2003--and Walldorf, Germany-based SAP--the world's largest business application vendor with $8.8 billion in revenues last year--would have created a $41 billion software goliath and undoubtedly would have attracted antitrust scrutiny from governments on both sides of the Atlantic. It's uncertain whether such a merger would show Oracle to be correct about the diversity of the ERP software market or bolster the government's case. On the one hand, it says that Microsoft, which is currently the fourth largest ERP software provider in the world, according to market researcher IDC, is an ERP software player to be reckoned with. On the other hand, it says that Microsoft--whose ERP brands, including Great Plains, Navision, and Axapta, mostly sell to small and medium-sized businesses--would rather buy its way into the upper echelons of the ERP market than build its way. As is always the case with antitrust and competitive issues, how good or bad a deal is comes down to the establishment by lawyers of the relevant market and the acceptance of those boundaries by judges and juries.

At this point, the discussion of a Microsoft-SAP merger is moot, because the merger would have created a whole new set of headaches that the two companies (Microsoft in particular) were not ready to deal with. The Redmond, Washington, company says it called off the preliminary merger discussions "a few months ago . . . due to the complexity of the potential transaction and subsequent integration. There are no intentions to resume these talks," it stated. The talks did, however, result in a deeper partnership on Web services and a patent cross-licensing agreement, which the companies announced last month.