Clash of the Titans: Oracle and SAP

The battle fought between Oracle and SAP over Retek is simply the opening shot in what is likely to be an increasingly contentious war between the two software titans as they each seek to dominate the ERP market.

The battle started off with SAP making an unsolicited bid for Retek, a provider of ERP systems to the retail industry.  Oracle, caught somewhat off-guard in the midst of digesting its recent Peoplesoft acquisition, quickly responded with a counter offer of its own which SAP in turn countered, only to have Oracle finally close in for the kill today and sign a definitive merger agreement.  SAP could theoretically still try and wage a proxy battle (ironically similar to what Oracle did to Peoplesoft) but with today’s announcement it looks like Round 1 of the SAP/Oracle M&A war goes to Oracle.

Of course, this frenzied bidding activity has little to do with Retek (it’s a nice little company but nothing worth going to war over in isolation) and it has everything to do with the respective desires of SAP and Oracle to try and dominate the market for enterprise applications.  As both Oracle and SAP know all too well, once a company adopts an ERP platform, it is pretty much a customer for life given that swapping out ERP systems can make a liver transplant look like child’s play.  Thus, there’s really no good organic way for Oracle and SAP to grow their applications business other than acquisition.  The problem for SAP and Oracle is that there are a very limited number of potential acquisition candidates in each niche and therefore he who acts last will likely be left empty handed.   Thus, with both firms resolved not be left empty handed, the stage is now set for a series of pitched battles over seemingly insignificant niche enterprise application providers.

In fact, I was recently talking with an executive from the Emerald Palace (as Oracle is sometimes known in the Bay Area) and he confirmed that Oracle has a “hit list” of niche applications it wants to acquire.  As it happens, Retek was on the list, so Oracle felt like it had to join the fight if it was going to be able to execute on its grand strategy of application consolidation.

The only thing that one can be sure of in this acquisition war is that both players will have to overcome some serious handicaps if they hope to win it.   For SAP, its handicaps revolve primarily around the popular impression that SAP has an incredibly insular and ponderous culture which translates into a work environment that stifles creativity and fosters an almost fanatical “not-invented-here” perspective.  Like most impressions this is probably overblown (I’ll leave Jeff to comment on that), but I will say that many former SAP employees I have chatted with in the past have more or less reinforced that message mostly by saying somewhat cryptically that it’s a “very German” company.   Given this impression, convincing American software companies, many of which pride themselves on their freewheeling, authority-defying cultures, to sell out to SAP is a bit of an uphill battle.

Be that as it may, there are indications coming out of SAP that change is afoot and old impressions of the company may be somewhat dated.  First SAP is reforming its cumbersome management structure in an effort to make the company more fleet of foot, and second the CEO of TopTier (perhaps SAP’s highest profile and most successful US acquisition) who is apparently a big advocate of selective acquisitions, appears to be taking bigger leadership role in the company.  Indeed the offer to acquire Retek, which would have been SAP’s biggest and most technically “diverse” acquisition to date, suggests that SAP is indeed a changing animal.  However despite these changes, it will still undoubtedly have a hard time convincing potential targets that it has truly changed its stripes.

The good news for SAP is that Oracle has just as many, if not more handicaps in the eyes of most acquirers.  First off, Oracle’s almost comically acrimonious hostile takeover of Peoplesoft ended in a ruthless HR bloodbath that was reminiscent, as a certain Massachusetts Senator might say, of Genghis Khan.  Such an outcome can hardly have endeared Oracle to the senior management teams of potential targets and, given Oracle’s “hit list”, may even preemptively drive some firms into the arms of potential white nights well ahead of Oracle’s advance.   Second, while Oracle hasn’t foresworn acquisitions to the extent that SAP did in the past, it was not exactly Cisco either.  Up until recently, Oracle’s reputation as an acquirer was generally that of a cheap opportunistic bottom feeder.  That changed a bit with Peoplesoft and now with even more so with Retek, but most acquirees probably realize that the higher the price Oracle pays up front, the bigger the cuts on the back end.  Of course, the dollar (or Euro as the case may be) is king and if the Peoplesoft Saga proved anything it’s that any deal can ultimately get done if the price is high enough.

Perhaps the more interesting question raised by the whole SAP/Oracle battle though is what will the other software giants do, most notably Microsoft and IBM.  IBM has publicly foresworn getting back into the applications space, but as I outlined in an earlier post, this position gets more strategically tenuous by the day and the battle between Oracle and SAP only underscores this point.  For its part, Microsoft is perhaps the biggest wildcard.  Seemingly restrained by the feds from doing any big-bang deals in the software space, it may well have to rely on the acquisition of niche applications to help feed its growth.  While up until recently most people assumed Microsoft would confine its acquisition activities to its traditional consumer and SMB applications, its serious flirtation with SAP indicates that Microsoft does indeed harbor enterprise application ambitions.  With SAP and Oracle now gobbling up the niche players in the space, Microsoft may have to act now before the game of musical chairs is over or simply give up on ever making serious inroads into enterprise apps.

Right now the only certain conclusions in the enterprise application space are that there will be further industry consolidation (Trend #10 in my Top 10) and more fees for M&A bankers.  Everything else is up for grabs.