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MICROSOFT DISCUSSED MERGER WITH SAP

07 Jun 04. THE WALL STREET JOURNAL reported that Microsoft Corp. and SAP AG of Germany revealed that they held merger talks recently, in a sign of how slow growth in the corporate software market is forcing old enemies to join forces even as they battle for the same customers.

Microsoft said Monday that it approached the German business-software giant late last year about a potential merger between the two rival software titans. Both companies said the talks ended this spring and they have no intention of resuming the discussions.

A Microsoft takeover of SAP would have been one of the largest deals in software-industry history, given SAP’s market capitalization of about $50 billion.

The disclosure came as Microsoft, the world’s biggest software seller, faced the first day of a trial brought by the U.S. Justice Department to block a $7.7 billion takeover by another business-software giant, Oracle Corp., of peer PeopleSoft Inc.

Microsoft and SAP, which expected details of their talks to emerge at the trial, disclosed the discussions in almost simultaneous press releases. Microsoft said Oracle obtained certain confidential information in the pretrial discovery process.

SAP, Walldorf, Germany, is the No. 1 supplier of business-application software. SAP spokesman Herbert Heitmann, said the two companies have been in ongoing discussions about how to collaborate for a year or more. Late last year, he said, Microsoft suggested raising the level of the talks to the possibility of a merger.

Like Microsoft, SAP downplayed how advanced the talks were and described the discussions as “exploratory.” Mr. Heitmann added that “there was no deal on the table” and regulators weren’t involved.

Microsoft, of Redmond, Wash., said it ended the discussions a few months ago and cited the “complexity of the potential transaction and subsequent integration” as a reason for the collapse of the talks, in a news release yesterday. Jim Desler, a spokesman at Microsoft’s headquarters in Redmond, Wash., declined to comment further.

That Microsoft would hold talks with SAP is a sign of the challenge the American software giant has in finding new growth as its core business of personal computer software matures. The company also makes similar business-application software to SAP, but aims it at companies that are smaller than SAP’s core customers, which are mainly large corporations. Microsoft executives have repeatedly said over the past year that they aren’t interested in the area that SAP focuses on, largely because of that market’s slow growth.

Still, a merger of the two companies would make sense, because their product lines are complementary. Microsoft’s market cap is about $280 billion, or more than five times that of SAP, and the U.S. giant has a large cash hoard.

Both companies make software that businesses use to automate tasks such as accounting and supplier relationships, but they are focused on different ends of the market. Microsoft executives predict that they can expand their so-called business applications business to revenues of $10 billion a year by the end of the decade, by focusing their products on worldwide companies with less than 1000 employees.

In seeking antitrust clearance for its bid for PeopleSoft, Oracle is seeking to show that Microsoft intends to compete in the market for business applications for the world’s largest companies. The disclosure that Microsoft has had an interest in acquiring the largest provider of such software could bolster Oracle’s argument, as well as provide backing for Oracle chief executive Larry Ellison’s contention that slower technology spending is driving an inevitable consolidation of the software industry.

Microsoft and SAP have long been partners, but increasingly have become competitors as well. Most installations of SAP’s programs — more than 40,000 world-wide — run on Microsoft’s Windows software. But the two companies have increasingly appeared to have design

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