Microsoft to acquire SAP?

Rumours have abounded for the past few years about Microsoft bidding to acquire SAP, and now Microsoft has raised $3.75bn in the first bond issue in its financial history, refuelling those rumours. (Microsoft already has a formidable cash mountain of around $25bn, even after last year’s special dividend of $32bn).

Would SAP make a good acquisition for Microsoft?

In the past, Microsoft has focussed on selling volume products to smaller customers; in the business area, typically focussing on the SME market for ERP-type applications. Through several acquisitions it has built a Dynamics business around primarily its Great Plains, Navision and Axapta product lines. I believe that the AX ERP product is extremely strong in the mid-market for businesses, but Microsoft has continued to suffer from its “small company” image, and had found it difficult to make significant inroads into larger companies.

Microsoft has also suffered from the same problems with its database, SQL Server, easily the best technical product in the marketplace and, in my mind, far superior to Oracle. Although SQL Server is at long last making some inroads into larger organisations, it has been a long and steep slope that has taken many years more than such a good product deserves.

So one can see why Microsoft is considering SAP. Its acquisition would immediately put Microsoft onto the same level as Oracle in the battle for ERP market share, and open up the top end of the market - although one has to wonder what Microsoft will offer to SME’s – Dynamics or SAP Business One? I believe that the Dynamics AX product set is the superior offering in the middle market, although SAP may have more market share. In the short-term I would expect Microsoft to support all products, although it must aim to converge towards one or possible two products in the long term.

With Oracle continuing down its acquisition route, with SUN Microsystems its last major buy, and Microsoft failing in its bid to acquire Yahoo, Microsoft needs a big acquisition to move forward, and SAP seems perfect.

However, I can see problems ahead if the acquisition is made - my experience of cultures of the two companies is that they are significantly different. In addition, despite its protestations to the contrary, Microsoft remains a technology company, and has never fully understood the business applications software market – if Microsoft tries to impose its own culture and processes onto SAP, then I hate to think what the result may be. But perhaps SAP will be allowed the upper hand in the business applications area, and Microsoft will benefit from their different approach....

P.S. What about Business Objects, SAP’s last large acquisition? Although it comes with Crystal Reports, the reporting engine of choice for many Visual Studio programmers, the Business Intelligence (BI) software would compete directly with Microsoft’s own BI tools. Again, I see the two BI products co-existing in the short-term, but, I suspect that Microsoft would aim to see convergence towards a single BI product set – in this case I’d put my money on the Microsoft tools winning in the long run....