BW: Why SAP Is Sitting Pretty

BusinessWeek: Oracle's bid for PeopleSoft promises to be a boon for the German software giant -- even if Larry Ellison's takeover attempt is thwarted

When the dust settles over Oracle's (ORCL ) $5.1 billion hostile takeover bid for rival PeopleSoft (PSFT ), the biggest winner may turn out to be Germany's SAP (SAP ) the giant of the corporate applications, or enterprise, software market.

Short term, whether the deal goes through or not, SAP will benefit from the industry turmoil. It'll look like a safe alternative to corporate purchasers searching the horizon for a solid technology supplier that they can count on. And longer term, should the Oracle deal happen, SAP will get a fair shot at convincing former PeopleSoft customers to switch to its software rather than to Oracle's. "If the deal goes through or it doesn't go through, SAP does well," says Laurie Orlov, research director at market researcher Forrester Research. "This is a wonderful thing for them. They must be salivating."

SAP executives are doing more than that. On June 12, they launched a new ad campaign aimed at winning over discontented PeopleSoft customers. In addition, its salespeople have been given the go-ahead to offer those customers financial incentives for switching to SAP applications. "We're the safe harbor. All our marketing and branding for years comes into play," says Herbert Heitmann, SAP's senior vice-president for corporate communications.

BIG PLAYERS IN PLAY. Oracle CEO Larry Ellison set all of this in motion with his June 6 bid to buy PeopleSoft, which came just five days after PeopleSoft announced its own $1.7 billion stock offer for JD Edwards (JDEC ). These two moves put into play the No. 2, No. 3, and No. 4 players in the $13 billion market for corporate software that manages accounting, manufacturing, and human resources. Right now, Oracle leads PeopleSoft by a hair as No. 2, with a 13% share, compared to PeopleSoft's 10%. JD Edwards is a distant No. 4, with 5%. And SAP? It's No. 1 by a wide margin, with a 35% share, according to market researcher AMR Research.

Plenty is at stake. The overall $35 billion enterprise software market, in which all of these companies compete broadly, is growing at a sluggish pace. AMR Research expects it to expand by just 3% this year. But since the suppliers of this software charge annual maintenance fees of anywhere from 15% to 22% of the software's original cost, whomever can get customers and keep them gets a steady supply of annuity-type income. So it's a market-share game. "This is an opportunity for us to bulk up our business," says Ellison.

Initial reaction from at least some PeopleSoft customers to the Oracle bid was negative. "They're still in shock and panic mode -- the vocal ones anyway," says Jim Shepard, a senior vice-president at AMR. Over at Meta Group, a rival market researcher, a Web-site poll of PeopleSoft customers conducted June 6 and 7 showed that, if the deal goes through, 41% of them would consider alternatives to Oracle when they decide to buy more software. So Oracle has no lock-in.

"GRACEFUL" TRANSITION? Ellison & Co. vows to win over these customers with plenty of TLC. It has promised to support PeopleSoft's older suite of applications, called PeopleSoft 7, in addition to its newest version, PeopleSoft 8. In addition, Oracle will create software to ease the migration from PeopleSoft products to its own applications. Oracle is also offering free software for PeopleSoft customers who switch, though the details of that pledge haven't yet come out. Says Oracle's Ellison: "We'll succeed if we do our job and support PeopleSoft customers and make it graceful for them to move our products."

For its part, SAP has some advantages when it comes to winning over corporations. It already has 19,500 customers worldwide, many of whom also buy from Oracle and PeopleSoft, so those who decide to buy new applications may be just as comfortable with SAP as they are with Oracle. SAP CEO Henning Kagermann has focused on better quality and service to improve customer relations. His long-term goal is to make SAP a "trusted adviser" to corporations. "We have to convince them, with our software and our behavior, that we're trustworthy," he says.

Some evidence shows that he's making progress. SAP's customer-satisfaction surveys, conducted by an independent firm, rank the German company 7.4 on a scale of 1 to 10. The score has been moving up steadily over the past two years. SAP is also making market-share gains. Based on its current performance, AMR expects SAP's share of its core market to climb from 33% in 2001 to 36% this year.

In the go-go 1990s, SAP's reputation as a solid but unexciting company worked against it. But the mood has changed. "They're the leader in a very conservative market. Customers are so risk-averse, and SAP looks like the least risky alternative," says AMR's Shepard. In a world where being safe is sexy, SAP may be the biggest eye-catcher on the block.

By Steve Hamm in New York

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