Microsoft's battle plans: a stake in PeopleSoft, a buy out of SAP?

Mircosoft’s Bill Gates was rattled by Oracle’s hostile takeover bid for PeopleSoft to the extent that he considered a ‘white knight’ offer to buy a stake in the latter as well as attempting a merger with SAP.

"Thinking about this PeopleSoft bid... made me wonder if we should approach them and suggest a minority investment to bolster their independence" Gates wrote in a June 7, 2003 e-mail to Microsoft CEO Steve Ballmer. “If it was done right it would not offend SAP, I don't think."

As for SAP, in the same e-mail, Gates told Ballmer that "it’s time we bought SAP. Given our view of the need to strengthen our platform... it seems interesting. Negatives would be complexity. I don't think there would be regulatory issues, but that could be naive".

The proposed SAP bid was then examined by an internal acquisition team which wrote a report dubbed "Project Constellation" to mull the pros and cons of the SAP takeover. This report expressed Microsoft's grave concerns about the Oracle bid, now valued at $7.7 billion.

In an e-mail sent to Gates and Ballmer along with the report, Microsoft executive Cindy Bates predicted that PeopleSoft's opposition to the Oracle bid would block its progress, but concluded that the shape of industry and its dynamics had changed. "We should think proactively in determining our fate, as no doubt the folks in Armonk (IBM’s headquarters) are doing” she told Gates in another email.

In a strange twist, Bate’s email contained code words for each of the major players in the market Oracle was 'Ophiuchus, SAP 'Sagittarius', 'Pegasus' for PeopleSoft, Indus for IBM and 'Mensa' for Microsoft. A Microsoft bid for SAP could "preempt tightened relations between Sagittarius and Indus" warned Bates.

Microsoft was also concerned that Oracle CEO Larry Ellison would exploit the fuss over the takeover bid to raise his own profile further, gaining a PR and propaganda advantage. "The bid has given Ellison a platform to market his view of the future" the Constellation report warned.

Giving evidence to the appeal hearing in the Oracle v Justice Department court case on Wednesday, Microsoft’s senior vp for Microsoft Business Solutions Doug Burgum said the SAP bid had been abandoned and insisted that perceptions about Microsoft are wrong. He said "It is not true that we intend to move in that space. Microsoft's strength as a company is in packaged software with low prices and high volume. The two are very different".

To support his argument he somewhat bizaarely found himself making a virtue of the fact that Microsoft Business Solutions is an unprofitable operation with products ill-suited for large companies.

According to Burgum, moving into the enterprise space is not on the Microsoft agenda. "It would take more money than... Microsoft would be willing to commit” he claimed. Microsoft currently has $56 billion in cash at its disposal. Although the amount Gates was prepared to offer for SAP was not diclosed to the court, his proposed offer price did carry a premium. "Something to think about" Gates wrote. "It's not cheap. $38B valuation so assume we would have pay - or a bit more".

Burgum said the fact that Microsoft even considered buying SAP indicates how difficult it is to break into the enterprise market, supporting the Justice Department argument that it is a closed market to anyone other than SAP, Oracle and PeopleSoft. "If we were to consider one (expansion) scenario, we would consider the 'buy' scenario instead of the 'build' scenario” he said.

But a senior SAP executive testified that there was room for other players. Richard Knowles, vice president of operations for SAP America, said that SAP believes that an Oracle-PeopleSoft combination could make the market for business software more competitive, not less. “The only thing we should anticipate is the same level of competitiveness, and perhaps even greater competition" Knowles said.

He said SAP expected that a combined Oracle-PeopleSoft could reverse the decline both are facing in the market for business applications because they would have the largest market share along with a much bigger salesforce. "They'll gain the No. 1 position and they'll do anything to maintain that position" Knowles said. "They would turn up that Oracle marketing machine. It would have a real apps business".

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