With low growth prospects in the U.S. and uncertainty building in Europe, earnings have been hard to come by for many firms. As a result, many arch-rival companies have engaged in price wars in order to subdue the competition and continue growing in this harsh environment. While most companies seek to beat the competition far and square, a few have taken more extreme measures to hold on to their market share.
Over the past few years, SAP (SAP) – the German software giant – was allegedly using a subsidiary, TomorrowNow, in order to recover and copy huge reserves of Oracle (ORCL) software and confidential data by pretending to be a client. This was accomplished by using a customized software tool called ‘Titan’ which allegedly was used to plunder Oracle’s website of patches, updates, fixes and other programs crafted for Oracle’s paying customers, according to a report by the AFP. Eventually, authorities sniffed out this plan and Oracle sued SAP for stealing its intellectual property. Much to the delight of Oracle shareholders, SAP lost and lost big; a U.S. jury has ordered the firm to pay out a record fine of $1.3 billion, the largest amount ever for a copyright infringement case.
The total fine represents more than half of SAP’s total profit from all of last year but about 33% of the company’s total cash on hand. While this suggests that the German firm should have little trouble paying Oracle, the company has set aside a paltry $160 million in case it lost, suggesting that the hit on SAP’s bottom line is likely to be severe in the short-term. Analyst Rebecca Wettemann of Nucleus Research said:
This will cost SAP moving forward. Oracle is going to be asking whether you want to buy from an innovator or someone who is stealing others’ innovations.
The resulting fine looks to impact ETF holders as well since SAP makes up the top weighting for the Merrill Lynch Software HOLDR (SWH) coming in at 19% of total assets. Due to this heavy weighting and the high concentration of HOLDRs, look for continued concerns from SAP to weigh on this fund.
With this being said, some believe that the issue just represents a short-term problem for the company and that SAP is unlikely to lose out on much because of this setback. Patrick Walravens, an analyst with JMP Securities, said:
Customers are sophisticated. They buy software that solves problems, and SAP solves a lot problems. The implications from this are more around the way people do business, which is, you have to be really careful about infringing people’s copyrights. Even if you think the damages from that behavior aren’t very big, you can end up having to pay a lot of money.
Furthermore, the other top holdings of SWH include Oracle at 15.5% so any losses from SAP that flow to ORCL will leave ETF investors in pretty much the same net position. This suggests that while the news isn’t good for SAP, ETF investors appear to be more than adequately protected from any downturn in the company’s fortunes in both the short and long-term.
Disclosure: No positions
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