• United States

SAP: Oracle-PeopleSoft merger would help competition

Jun 23, 20044 mins
Enterprise ApplicationsFinancial Services IndustryMergers and Acquisitions

An Oracle-PeopleSoft merger would boost competition in the market for enterprise applications, an SAP America executive testified Wednesday in the U.S. government’s case to block the proposed merger.

An Oracle-PeopleSoft merger would boost competition in the market for enterprise applications, an SAP America executive testified Wednesday in the U.S. government’s case to block the proposed merger.

“We anticipate a greater amount of competitiveness,” Richard Knowles, vice president of SAP America, a subsidiary of Germany’s SAP AG, said. Knowles was called in federal court in San Francisco by Oracle, which is challenging the U.S. government’s attempt to block its $7.7 billion hostile bid for rival PeopleSoft.

During questioning by an Oracle attorney, Knowles also said all SAP buyers have high functional needs and that SAP competes against numerous vendors, not just PeopleSoft and Oracle. The testimony undermines the U.S. Department of Justice’s argument that only Oracle, PeopleSoft and SAP can meet the human resources and financial management software needs of large and complex enterprises.

In the U.S., SAP currently holds 34% of the enterprise application market, Knowles testified. If the acquisition of PeopleSoft by Oracle goes through, Oracle would have 38% market share, leap-frogging SAP, he said.

“Oracle would become the number one provider in the U.S., and would do anything to keep that position. We, from an SAP position, think that would be highly competitive for us,” Knowles testified. “We’re going to see more sales people being marshaled into a position competing against us.”

Still, asked if SAP has a position on the merger, he said the enterprise applications giant is “neutral.”

The answer appeared to surprise Judge Vaughn Walker, who oversees the case. The direct question of whether SAP would mind if one large competitor was eliminated because it was folded into another was not asked.

The DOJ doesn’t see Knowles’ testimony hurting its case, said Thomas Barnett, deputy assistant attorney general, speaking during a break in Knowles’ testimony.

“The notion that two competitors are going to be better than three competitors does not follow,” Barnett said. “Customers have consistently testified that they would prefer three options, rather than two. I put more weight on the customers.”

The DOJ’s argument is that Oracle, PeopleSoft and SAP dominate the market for human resources and financial management applications and that an Oracle-PeopleSoft merger would create a duopoly, hurting competition and resulting in escalating prices. Oracle’s argument is that there are several other viable vendors in the segment such as Lawson Software, American Management Systems and Microsoft.

As evidence, Oracle introduced several SAP documents identifying Microsoft as an increasing threat. “Microsoft is gaining ground in SAP’s territory,” read one such document, which showed the results of SAP’s “Global Win Loss Program” for a nine-month period in 2002 and 2003.

During cross-examination by DOJ attorney Claude Scott, Knowles said SAP competes against Microsoft mostly at the lower end of the market. “Typically that is where we have been seeing them,” Knowles said.

The DOJ’s case rests largely on convincing Judge Walker that a market for “high function” human resources and financial management software for large and complex organizations exists. This is the market where the DOJ argues Oracle, PeopleSoft and SAP have no real competition.

SAP defines the midmarket for sales purposes as companies with between $200 million and $1.5 billion in annual revenue, Knowles testified. The company sees Microsoft mostly in deals with customers that have less than $200 million and occasionally as much as $350 million in revenue, he said.

Knowles’ testimony was “terrific” and addresses the core issue of the case, Oracle attorney Dan Wall told reporters outside the courtroom. “We don’t have to justify a merger by saying the market is going to be more competitive; the government’s burden is to establish it is going to be substantially less competitive,” he said.

Witnesses from consulting companies Accenture and BearingPoint also testified earlier in the trial that the merger would not be anticompetitive, Wall noted. Both said Microsoft would be competing in the space as well.

Later Wednesday the head of Microsoft’s Business Solutions group, Doug Burgum, is scheduled to take the stand. Burgum is expected to testify that Microsoft is not targeting the high-end of the enterprise applications market, but focuses on small- and midsize businesses.