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SAP: What, Us Worry About Oracle?

When Oracle (ORCL) announced plans on Sept. 12 to buy software maker Siebel Systems (SEBL) for $5.85 billion, no one should have been more alarmed than arch-rival SAP (SAP), the world's largest seller of big-ticket corporate-software suites.

The driving motivation of Oracle's two-year, $19 billion binge has been catching SAP in the market for so-called enterprise applications, which help companies handle all manner of tasks, from tracking finances to managing salespeople (see BW Online, 09/12/05, "Now, Oracle May Finally Rest"). By snapping up Siebel, which pioneered the category known as customer relationship management, or CRM, Oracle has rounded out its product portfolio with a package widely seen as the best of its breed.

Along the way, Oracle Chief Executive Larry Ellison has whittled the corporate-software industry to two behemoths towering over hundreds of small makers serving local markets or specialty niches.

MESH OR MASH? Oracle's growth spurt makes life more difficult for SAP. The German giant's strongest response is that its own packages -- which handle accounting, human resources, customer and supplier relationships, and product planning -- mesh better than the so-called point solutions from various vendors that handle one job apiece. Oracle faces a mammoth task weaving together the half-dozen packages, including PeopleSoft's, that it has bought recently. But when it does, its suite could finally match SAP's crown jewels.

SAP doesn't seem worried. It's partway through a modernization of its packages that analysts say could revolutionize business software (see BW, 07/11/05, "SAP: A Sea Change in Software"). Oracle may stumble trying to get all of its new programs to work together. And some former PeopleSoft and Siebel customers could flock to SAP amid possible concerns that Oracle won't support their products.

To gauge SAP's reaction to the Oracle-Siebel deal, BusinessWeek European technology correspondent Andy Reinhardt to SAP CEO Henning Kagermann on Sept. 13. Edited excerpts of their conversation follow:

Why are there so many mergers and acquisitions these days in the software business?

Let me start with some background. SAP was very much challenged at the end of the 1990s by new companies, like Siebel, i2 Technologies (ITWO), Ariba (ARBA), and so on -- more than we were by Oracle.

At that time, we lost market share. We were not losing to Oracle and PeopleSoft as much as we were to the new guys, who took share. They took it because they had a new concept and good products, so they could grow very fast, organically.

You might ask why larger players, including SAP, didn't respond more. The answer is that we were all -- at least at SAP -- very focused on completing our offerings in the areas where we were strong, that is ERP (Enterprise Resources Planning) and industry solutions around it.

At that time, four or five years ago, people urged us to acquire companies to catch up. They said we would never make it (on our own), and suggested we buy another CRM company, in order at least to have something we could use to fight back against Siebel. Instead, we decided to do most of it ourselves, and we made only a few very small acquisitions.

Was that a wise move?

If you look to history, you see that we were right. What the customers really wanted, after some time, was a better-integrated solution, all from one vendor, and not the complexity they got from using best-of-breed programs. They bought best-of-breed for a while, but they didn't like it.

We have gained market share more or less continuously since 2001. Back then, Oracle - at No. 2 in the market -- was roughly half SAP's size globally. Since then, the gap has widened. We gained market share, Oracle lost share, and the best-of-breeds, particularly, lost share.

What's happening now, as I predicted a few years ago, is a movement to a few very large players. That's more or less a consequence of what customers demand. You will not see many of the midsized companies survive because they don't have the muscle, and they can't complete their offering. They are only point-solution providers.

Of course, other people could have bought Siebel. It could even have been SAP. But why should we, when we have the better product, and we are the market leader, and we can grow organically and gain market share?

So what motivated Oracle to buy Siebel?

Why did Larry Ellison do it? Because he had lost market share. He was not a friend of acquisitions in 2001 or 2002. He said the same thing we said back then. But things have since changed, and Oracle has a different strategy. It has acquired most of these companies--JD Edwards, PeopleSoft, Retek, and now Siebel.

Yet, what has happened is surprising. Oracle has spent roughly $19 billion on its last five acquisitions. But if you look at it from a market-share point of view, even with the five combined, Oracle is still the same size relative to SAP as it was four years ago -- half our size.

I think he [Ellison] had no other choice. He says he wants to be No. 1, but he's just half of SAP, so I ask myself, how can he become No. 1 when there are no other targets left to buy?

How are customers reacting to the Oracle acquisitions?

When we speak to customers that have both SAP and Oracle or Siebel software, we see that they are concerned. Why? Because -- look -- there is no clear roadmap for what will happen to these products.

How will customers cope with the complexity of the combined Oracle/PeopleSoft/JD Edwards portfolio? It includes competing offerings for CRM, human resources, and others, built on different technologies and designs. But which solutions will be continued? And what will be the migration path from one to another? Who will take care of the maintenance issues for discontinued products? All of these questions are critical for customers, and they can't see a clear answer.

Is that driving business to SAP?

At the very least, it's strengthening our position. We have a very clear and compelling strategy we announced three years ago, and we deliver on it every year. And customers know what to expect. There is no uncertainty around SAP. If you follow us, you can see that we make promises and then deliver. We are executing on a transparent roadmap, and our customers appreciate it.

We are hearing, though, that you may not be getting as much bounce as you had hoped for out of the uncertainty following the PeopleSoft acquisition. Are you satisfied with the level of defections you're seeing?

Yes. But I don't view this as a short-term thing. What's happening is that these customers are, to some extent, locked in for some time. Migrating an application involves some expense; you don't just decide it overnight and the next day you spend the millions.

What customers want is options, choice, and time, and we have given them all that, so they can decide what is best for them in the years to come. We have had a lot of interest, but the nature of the business means customers don't come over immediately.

What is your strategy for on-demand software that is delivered over the Internet, like a service?

We know what we want to do, from a strategy point of view. The question is more one of communication. We will have an announcement, both about product and go-to-market strategy. You will see it before the end of the year.

Are we seeing the formation of a new tech bubble?

No, we're not even close to what happened in the last bubble. It's not the same thing at all. People should not be worried about it.

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