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SAP Just Gained Strong Allies Against Oracle

Posted on Friday, Oct 29th 2010

SAP (NYSE:SAP) this week reported strong sales in its third quarter, but the upcoming trial for the Oracle lawsuit and drama that will likely ensue is a dampener. Oracle recently accused former CEO of SAP, Leo Apotheker, of overseeing an espionage scheme. Leo Apotheker has recently been hired as the new CEO of HP, while Mark Hurd has been hired by Oracle as one of its presidents. Apotheker’s appointment has led to the speculation that HP may acquire SAP. Let’s take a closer look.

Oracle Lawsuit
The latest developments at SAP and Oracle are dramatic. SAP acquired TomorrowNow in 2005 but shut it down in 2008 after Oracle filed its lawsuit and long before Apotheker became SAP’s CEO in June 2009. TomorrowNow provided maintenance services for customers of Oracle’s PeopleSoft and J.D. Edwards software, and Oracle accused the company of downloading software patches and other materials illegally from its customer support website. The trial will start from Monday, just when Apotheker joins HP as CEO. Oracle is seeking $2 billion in damages, while SAP thinks $160 million is reasonable.

SAP’s Financials
In its third quarter results, SAP this week reported revenue of €3 billion ($4.14 billion), up 20%. Software and software-related service revenue grew 20% to €2.32 billion while software revenue grew 25% to €656 million. Net income was up 12% to €501 million ($692.5 million) or €0.42 per share from €447 million or €0.38 per share last year. The third quarter results include contribution from its Sybase acquisition which was completed on July 30. The company ended the quarter with liquidity of €2.83 billion ($3.91 billion).

SAP reiterated its 2010 outlook. It expects full-year 2010 software and software-related service revenue to increase by 9% to 11% at constant currencies. Excluding revenue from Sybase, acquired in May, the company expects revenue to grow 6% to 8%. The stock is trading around $51 with a market cap of about $60 billion. It hit a 52-week low of $40.95 on May 25 and a 52-week high of $53.10 on October 13 following speculations of HP acquiring SAP.

Chart forSAP AG (SAP)

HP–SAP?

Larry Dignan of ZDNet asks if HP will acquire SAP and bolster its software portfolio.

“HP and SAP have a common enemy: Oracle. Meanwhile, HP has the resources to acquire SAP. And SAP’s ownership of Sybase plays well with the enterprise mobility theme HP has been targeting via the acquisition of Palm.”

HP’s hiring of Apothekar is an indication of the significance of enterprise software for HP. I earlier suggested that HP’s acquisition of Palm might lead HP to strike up a strong partnership with SAP in the domain of mobile enterprise applications. With a market cap of about $60 billion, an acquisition might be far-fetched, but as I suggested earlier, a strong partnership is more suitable and likely.

Doug Henschen of Intelligent Enterprise says such an acquisition would be costly and foolish and suggests HP could get more bang for its buck by acquiring smaller SaaS vendors like SuccessFactors, RightNow, NetSuite, Workday, Adaptive Planning, Host Analytics, PivotLink, and others.

CIO lists the reactions of analysts to such a speculation. Forrester Research analyst Paul Hamerman says a SAP acquisition would harm HP’s application services organization. Altimeter Group analyst Ray Wang says

“SAP is better off partnering with both HP and IBM. Together, the vendors can go after Oracle, with IBM and HP providing the services and sales channels for SAP’s software… All of Oracle’s competitors are now SAP’s friends and soon to be HP’s friends.”

Jon Reed, an independent analyst, says

“I get the feeling SAP would be a little lukewarm to the idea right now. The recent Sybase acquisition and subsequent launch of an enterprise mobility strategy has provided SAP with a morale boost and clarification of direction.”

I agree. I don’t think an SAP acquisition by HP is likely at the moment. But given’s Oracle’s strategy of going after HP and IBM, SAP has certainly recruited new, powerful allies in the market.

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