Until recently, two things about Microsoft were certain. One, that it prefers small acquisitions. “We love 10-, 20-, 30-person companies that may or may not be public, with great talent that we can relocate,” said Steve Ballmer, CEO of Microsoft, recently. And two, that it only sells business applications software to small and medium-sized enterprises (SMEs) and departments within large groups.
At a stroke, both perceptions have been challenged – and by Microsoft itself. Speculation that it has ambitions in high-end business software have swirled around the company for years – especially since 2002, when it acquired Great Plains and Navision, two companies that developed enterprise resource planning (ERP) and customer relationship management (CRM) software for SMEs.
The rumours came to a head when Oracle, defending its $7.7 billion hostile takeover bid for enterprise applications company PeopleSoft to anti-monopoly regulators, cited the likely future threat of Microsoft as proof that there was plenty of competition in the sector. The claim persuaded Microsoft to do something extraordinary: in March, executives made a sworn statement that Microsoft had no plans to enter the high-end business software market for at least two years.
Today, that sworn statement is looking somewhat less than watertight. For months, Oracle has been building a legal case for its acquisition of PeopleSoft. During its investigations, Oracle somehow obtained evidence that Microsoft had discussed a merger with SAP during the winter. Once SAP and Microsoft realised this might all come out, they were forced to admit publicly that merger talks had indeed taken place. Those talks, described only as “preliminary”, were ended because both sides were worried about “the complexity of the potential transaction and subsequent integration”.
Pointedly, neither of the statements from SAP and Microsoft referred to possible regulatory hurdles, although there would have been many, says Philip Carnelley, an Ovum analyst. “I am not surprised it soon became clear the idea was a non-starter,” he says.
Yet the fact the idea existed in Microsoft executives’ minds at all is significant. It is easy to understand what planted it there, argues Carnelley. “Clearly, Microsoft is prepared to think big thoughts. In a mature and largely static market, for Microsoft to continue to grow ahead of the market it needs new ideas. It had one here,” he says.
Microsoft’s business software division, Microsoft Business Solutions, is under pressure. It is spending three dollars for every dollar it is getting back in revenue, and had one of the worst performances of any of the company’s various units last quarter. Earlier in June, Ballmer moved to directly oversee the unit.
For now, things are hardly assuming crisis proportions. But Microsoft Business Solutions cannot rely on the strength of the larger company’s core businesses – operating systems and desktop applications – to keep baling it out: although sales overall grew 17% last quarter, and are likely to rise another 12% in the current quarter, analysts are projecting Microsoft’s annual revenue will grow only 6% in 2005 as its main markets mature.
It is thus clear to Microsoft that it must find new sources of growth. Thanks to a huge stock market valuation (about $280 billion in early June) and a $51 billion cash pile, the company can buy almost anyone. Now a merger with SAP seems dead, what price a move on the UK’s Sage?
