Larry, You Picked A Nasty Fight

In taking on heavyweight SAP, Oracle faces very long odds

When Oracle Corp. announced it had acquired retail- industry (ORCL ) software maker Retek Inc (RETK ). for $650 million on Mar. 22, it brought to an end a tumultuous, three-week bidding battle with corporate software rival SAP (SAP ). The operatic contest included a series of frenzied bids and counterbids and even corny gibes by Oracle Chief Executive Lawrence J. Ellison, who continually referred to SAP as "sap." Ellison snatched Retek away from SAP -- which had bid first. But when the dust cleared, the prize looked paltry. To get a foothold in the retail industry, Oracle paid nearly a 100% premium for a little-known Minneapolis company with 525 employees and revenues of just $174 million last year. What's it all about?

This is a small piece of a very big battle: Oracle vs. SAP for dominance of the $47 billion market for corporate applications software. And neither side is giving an inch. The once-fast-growing market for applications software -- which is used to manage accounting, purchasing, human resources, and customer relations -- grew just 5% last year. Both companies need to grab share to boost their revenues. SAP is the longtime leader, so in an effort to gain ground, Ellison has embarked on a risky strategy. The first step was his $10.3 billion hostile takeover of No. 2 applications player PeopleSoft Inc., which was concluded Jan. 7. Now, Ellison is making a series of smaller acquisitions, and ultimately he plans to meld four product lines into a single package called Project Fusion. "SAP is a formidable company, but we have a shot at catching them," says Ellison.

Ellison's plan marks a detour for Oracle. The company's main business is selling database software, and it clearly dominates that market. On Mar. 22 it reported that revenues in the most recent quarter jumped 18%, to $2.95 billion, mostly fueled by database sales. Earnings dropped 15%, to $540 million, because of costs related to the PeopleSoft acquisition. But with PeopleSoft and other acquisitions, Ellison is picking up a huge base of customers to which he can sell databases and additional applications. He's betting that Oracle's integrated package of databases, applications, and software that links it all together will be snapped up by corporations eager to simplify their computing systems.

By picking a fight with SAP, though, Ellison is taking on a heavyweight that's heavily favored to punch his lights out in the applications market. With 26,000 corporate customers worldwide and a broad suite of products, SAP has become the gold standard for corporate applications. Goldman, Sachs & Co. (GS ) expects that among the top four players, SAP's share of software license revenues will vault from 59% in 2003 to 70% this year. Meanwhile, the firm expects Oracle's share (with PeopleSoft included) to fall from 30% to 20%. "There will be a lot of marketing rhetoric, but at the end of the day, SAP has such momentum that Oracle won't be able to dislodge them," says Goldman analyst Richard G. Sherlund.


SAP has definitely gone on the offensive. Before the ink had dried on the PeopleSoft merger, SAP began tempting PeopleSoft customers with a 75% discount for switching over. Last year, the 33-year-old German company lured several former Oracle customers, including PepsiCo Inc. (PEP ) CEO Henning Kagermann dismisses Oracle's acquisitions as a second-rate strategy. "Oracle will pressure us only if they make better applications, and I haven't seen that so far," Kagermann says.

How the two rivals perform in the coming year will probably decide the outcome. Oracle will have its hands full integrating PeopleSoft, Retek, and any additional acquisitions. Fusion is not expected to be finished until 2008. Meanwhile, SAP is remodeling its applications and a software program called NetWeaver, which will let customers build customized programs using SAP's products. SAP is hiring 1,000 engineers in an effort to finish the project in 2007 -- a year ahead of Oracle's Fusion.

This race is on. The technical challenges are huge, and either side could stumble. But the most intense pressure is on Ellison. He has set his sights on SAP before, and not much came of it. Now he's trying again, and the stakes are higher than ever.

By Steve Hamm in New York with Andy Reinhardt in Paris

— With assistance by Andy Reinhardt

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