July 3 (Bloomberg) -- SAP AG, the world's largest maker of business-management software, said it made ``inappropriate'' downloads of Oracle Corp. documents, responding to a lawsuit that claims the German company stole files from the competitor.

``We regret very much that this occurred,'' SAP Chief Executive Officer Henning Kagermann said on a conference call today. ``Even a single inappropriate download is unacceptable.'' SAP, whose shares fell 2.1 percent today, denied it had access to Oracle's intellectual property.

The admission hurts SAP's reputation as it battles with Larry Ellison's Oracle in the $56 billion market for software that manages tasks such as payroll accounting. The rivalry between SAP and Oracle escalated when Oracle filed its March 22 lawsuit claiming SAP workers hacked into a Web site and stole software codes on a ``grand scale.''

``It's very embarrassing for SAP, which has always been seen as a technology leader and also in issues such as compliance,'' said Ernst Konrad, the Munich-based head of equities at BayernInvest, which oversees $35 billion including SAP shares.

Shares of Walldorf, Germany-based SAP dropped 80 cents to 37.19 euros in Frankfurt. The stock has fallen 10 percent in the past year, the only decline among the 30 members of Germany's benchmark DAX Index.

Shares of Redwood City, California-based Oracle rose 15 cents to $20.07, their highest price in more than six years, in Nasdaq Stock Market trading at 1 p.m. New York time. U.S. stock markets ended trading at 1 p.m. today and are closed tomorrow for the Independence Day holiday.

TomorrowNow Unit

SAP said it will ``fully cooperate'' with the U.S. Department of Justice, which requested documents from the company and its Bryan, Texas-based TomorrowNow unit. Bryan Sierra, a spokesman with the Justice Department in Washington, declined to comment.

``We just got requests for documents late last week and at this point we don't know anything further,'' SAP spokesman Steve Bauer said in an interview. ``We are complying fully.''

A settlement with Oracle may cost SAP $100 million, Credit Suisse Group analyst James Clark and colleagues wrote in a note today. The case may last years, said Frankfurt Trust analyst Matthias Maus.

Downloads

SAP said TomorrowNow, which provides software support to clients, was authorized to download materials from Oracle's Web site on behalf of TomorrowNow customers. The unit made ``some inappropriate'' downloads of fixes and support documents, SAP said.

In its lawsuit, Oracle said TomorrowNow used identities of Oracle customers and phony users to gain access to its systems. Customers for whom SAP allegedly conducted illegal downloads included Merck & Co. and Bear Stearns & Co., according to the March 22 lawsuit. Oracle didn't say how much the damage cost the company.

Some downloads ``may have erroneously exceeded the customer's right of access'' and were ``in violation'' of TomorrowNow's policy, SAP said in today's response.

TomorrowNow is losing business because of the lawsuit, JMP Securities analyst Patrick Walravens said today in an investors' note. ``Our due diligence uncovered one Fortune 200 business that decided not to do a deal with TomorrowNow'' in the second quarter because of the pending lawsuit, Walravens said.

``SAP CEO Henning Kagermann has now admitted to the repeated and illegal downloading of Oracle's intellectual property,'' Geoff Howard, a lawyer for Oracle at Bingham McCutchen LLP in San Francisco, said in an e-mailed statement. ``Oracle filed suit to discover the magnitude of the illegal downloads and fully understand how SAP used Oracle's intellectual property in its business.''

Dropped Pants

SAP, scheduled to release earnings July 19, is expected to report a second-quarter revenue increase of 10 percent to 2.42 billion euros ($3.3 billion), the average estimate of 19 analysts surveyed by Bloomberg. Oracle, the world's third-largest software maker after Microsoft Corp. and International Business Machines Corp., said last week its sales may rise as much as 21 percent in the quarter ending Aug. 31.

Since 2005, Oracle has spent more than $25 billion buying rivals, the biggest run of acquisitions in the industry. The lawsuit underlines an intensifying competition that goes back to before 1996, when SAP co-founder Hasso Plattner dropped his pants in front of Ellison's support vessel during a yacht race.

Market Share

In September, an exchange of verbal blows erupted, with Oracle CEO Ellison saying the German company was losing market share and ``rethinking'' its strategy. SAP, in return, accused Oracle of publishing ``misleading'' views on the market leader.

SAP said its share in the market for business-management software, measured by its revenue from programs and related services, rose to 25.1 percent in the year ended March 31 from 24.5 percent in the 12 months through Dec. 31.

SAP and Oracle offer software maintenance services for each other's products. Oracle's June 1 amended complaint in U.S. District Court in San Francisco alleged SAP improperly obtained software-support documentation from an Oracle Web site and that TomorrowNow violated copyright law by distributing the material to customers.

Kagermann said today he was ``personally surprised'' that Oracle didn't contact SAP ``as soon as they felt something was wrong.'' The download of materials didn't cause significant harm to Oracle and Oracle's claims ``appear to be unfounded,'' he said.

Firewall

SAP didn't have access to Oracle's intellectual property because of a so-called firewall between SAP and TomorrowNow, the German company said.

Kagermann wouldn't rule out a settlement, saying ``all options'' are open.

``There's no question it's more likely that they'll settle now than a week ago,'' said Ross Dannenberg, a lawyer at Banner & Witcoff Ltd. in Washington, D.C., which specializes in intellectual-property law. ``In trial, Oracle is going to repeat SAP's admission to the jury as often and loudly as possible. It's going to be hard to ignore.''

A conference between the companies and Judge Martin Jenkins is scheduled for Sept. 4, according to a Web site SAP set up for the lawsuit, at http://www.tnlawsuit.com.

Unit Chairman Named

``The whole issue tarnishes SAP's reputation with clients and potential new customers,'' said Jochen Klusmann, an analyst at BHF-Bank AG, who has a ``reduce'' rating on SAP shares. ``Oracle will probably try to keep it in the public spotlight for as long as possible. That will be quite unpleasant for SAP.''

SAP today appointed Mark White, chief operating officer of the Americas unit, as TomorrowNow's executive chairman to manage the division's operations. TomorrowNow CEO Andrew Nelson will report to White. There was no sign that Nelson had knowledge of the inappropriate downloads, Kagermann said.

SAP acquired TomorrowNow in 2004 as part of its Safe Passage program designed to take customers from companies that Oracle bought, including PeopleSoft Inc. and J.D. Edwards & Co., by providing software support. TomorrowNow has 157 workers and annual sales of 15.7 million euros.

``Although many will see the legal teams as the cavalry in this battle, the troops that really matter are the PR special forces contingent,'' Ovum Plc analyst David Mitchell said. ``PR is where this battle will be won or lost.''

The case is 07-CV-1658 MJJ.

To contact the reporter on this story: Kenneth Wong in Berlin at kwong11@bloomberg.net

Last Updated: July 3, 2007 14:26 EDT