The small and medium sized enterprise (SME) business applications market is a popular place these days. Just a few weeks after ERP giant SAP announced it was to acquire TopManage in March 2002, Microsoft announced in early May that it intends to buy mid-market enterprise applications provider Navision.

Microsoft has offered $1.3 billion for the Danish vendor, making this deal Microsoft's second largest acquisition to date, after its $1.5 billion acquisition of design software developer Visio in early 2000.

Navision is not Microsoft's first foray into the enterprise applications market. In late 2000, it bought US-based business applications vendor Great Plains for $1.1 billion. What differs about the Navision acquisition is that the company offers the pan-European coverage that Great Plains lacked. Based in Denmark, Navision is one of the main suppliers of business

applications to the European mid-market, having acquired compatriot rival Damgaard in 2000. Around 85% of Great Plains' sales come from the US, while roughly the same percentage of Navision's sales are European-based. And while Great Plains and Navision both target small and medium-sized enterprises (SMEs), Navision tends to target higher end companies than Great Plains.

Charles Homs, a senior analyst at Forrester Research, believes Navision has "the potential to become the dominant player in its market," against competition from the likes of Swedish compatriots Intentia and International Business Systems (IBS). With more than 130,000 installations worldwide, and annual revenues of EU201 million, Navision will become Microsoft's largest product development centre outside of the US once the acquisition is complete.

However, Homs questions whether Microsoft's primary intention is to cast itself as a major player in the enterprise applications market. Homs points out that "[Microsoft] hasn't really done anything with Great Plains", emphasising that so far, Microsoft has sold Great Plains' two products separately from the rest of its software. The addition of Navision's three product lines means that, along with a planned CRM product launch, the company will have six different product lines in the same area. This could take "a number of years" to integrate and consolidate into two or three lines for smaller organisations and medium sized companies, according to Homs.

What Microsoft is really after, argues Homs, is the chance to have a greater influence on the technology standards used in these companies. In particular, this may be a good way for Microsoft to promote its .Net web services initiative over the Java 2 Enterprise Edition (J2EE) standard. In late October 2001, SAP announced that, while its software will run on .Net, it will be developed on J2EE, an approach that most of the large enterprise applications vendors are also taking.

"Because it [Microsoft] is such a dominant player in the operating systems and desktop applications markets, it portrays that same behaviour in other markets where it's completely unsubstantiated," says Homs, citing the portal and interactive TV markets as examples, says Homs. In short, Microsoft is afraid of not having a real say when it comes to the technology standards that will dominate the SME market. Microsoft also continues to fight the preconception that its products are suitable for departmental deployments, but are not fully scalable enterprise class applications.

With its large customer base, Navision gives Microsoft a strong European foothold, and Homs sees the potential for .Net to become the standard for SMEs, while larger enterprises will adopt J2EE. At the very least, he concludes, Microsoft will have acquired a couple of profitable companies that can continue to deliver value to its business.