Oracle Sues SAP: Below the Belt With a 2x4

I am just starting to dig into this 42-page complaint by Oracle (ORCL) against SAP (SAP), filed yesterday in U.S. District Court, Northern California.

My first reaction is "Say it isn't so, Henning!" To the best of my knowledge, SAP had not posted a public relations response as of 6:30 pm (nor would I expect a legal response for some time). This is seriously bad stuff. I come from the era of the minicomputer wars. That sport was bare knuckles but this is hitting below the belt--with a 2x4-- if true.

Not being a lawyer, I guess I am surprised at the tone. After a few pages superficially explaining the alleged crime, the complaint wanders off into something that sounds like a dime novel (e.g., "As SAP reeled, events unfolded at a rapid pace."). But unlike a dime novel, there is not a lot of specifics of what Oracle did to protect its IP other than claim copyrights, etc. (as would be expected I guess from a legal perspective). Like a dime novel, there is some good fictional dialog (by July 2006, SAP "CEO Henning Kaggerman had conceded SAP had lost 2% market share to Oracle."). I must have been on vacation for that one.

If this is true, why not call the cops? I expected to find out that that had occurred. What happened when SAP was confronted with its misdeeds? I do not see anywhere in pages 28-41 (what Oracle wants for "relief?") that that step ever took place.

Finally, I take off my indignation hat and my Law and Order hat and put my IT investment research hat back on. I wonder how widespread this bailout by JDE and PeopleSoft users is. Oracle says the alleged theft occurred not back when the acquisition was pending in 2003/2004 (when theoretically the users being "acquired" were rightly concerned), but a few months ago (when they were all happy as can be with the acquisition). A list of customers on page 24 reads like one of Oracle's quarterly "new customers" press releases. Merck and Honeywell are called out specifically in terms of showing pre-2006/2007 patterns and comparing them with the last few months.

Oh well. That's the fun of following Oracle. Never a dull moment.

Disclosure: Author has no position in any of the above-mentioned securities.

Comments

[Diana:]

You wrote:

"Like a dime novel, there is some good fictional dialog (by July 2006, SAP "CEO Henning Kaggerman had conceded SAP had lost 2% market share to Oracle."). I must have been on vacation for that one. "

Actually, it's not fiction--Kagermann's remarks were widely covered at the time. :

"SAP says lost 'a little' business software mkt share in Q2 to Oracle, Microsoft
07.13.2006, 01:19 PM

FRANKFURT (AFX) - SAP AG chief executive Henning Kagermann said his company lost 'a little bit' of market share in the highly competitive business software market to peers Oracle Corp and Microsoft Corp in the second quarter.

SAP's share declined by a 'maximum 1-2 percentage points,' Kagermann said during a teleconference with analysts and investors. "

www.forbes.com/markets...

From Reuters:

"SAP misses forecasts, loses mkt share; stock drops

Thu Jul 13, 2006 9:09am ET

FRANKFURT, July 13 (Reuters) - German software maker SAP AG missed analysts' expectations for the second quarter and lost market share to its peers for the first time in three years, sending its shares down as much as 10 percent....

...Chief Executive Henning Kagermann admitted that SAP -- whose software helps businesses automate processes including customer management, supply chains and payroll -- had lost market share to its peers which he estimated at 1 to 2 percentage points. "

(The Reuter's link is insanely long--just do a Google search and look in the news archives for 2006 (on the left under "news"--it's a new feature). You will be able to bring up the Reuter's article and others from July 2006 quoting Kagermann.)

Sincerely,

Diana

(Oracle shareholder)

2007 Mar 23 01:34 PM

[Dennis Byron:]

Thanks for the correction, Diana.

I was joking in my post last nite but I really was on vacation that second week of July and didn't see the Reuters interview. I did "attend" the SAP conference call the following week (July 20) when SAP formally announced its Q2 2006 results and I didn't make note of any comments along those lines. I am sure the handlers had Henning pretty well prepped by the following week not to fall into the trap if the same question were asked.

I call it a trap because--as I posted here on SeekingAlpha a few days ago--the way to look at these competitive comparisons is on a trailing-12-month basis. Even Oracle suggests that in its investor material. In this case, Henning apparently was comparing one of his historically slow quarters with Oracle's historically fastest growing quarter. [Not too smart but not as dumb as allegedly stealing thousands of documents (that I think he could legally buy under restraint of trade regulations).]

Time period is only one methodological quirk than investors need to look at when comparing competitive software market share claims. Are they talking about license, license and maintenance, or total revenue (including subscription fees) is another.

Exchange rate is another. As I posted in January--when SAP claimed to have gained 3 points on the market in 2006 on an annual basis--that is probably just as misleading because SAP got a big exchange rate boost last year by most methodologies.

Another important methodological technique is to backcast. Oracle rarely does that because it is not required by GAAP.

Trying to account for all these factors (and no mormalization actions are ever perfect), SAP grew its applications product business (eliminating NetWeaver revenue) 12.4% last year while Oracle only grew its comparable applications software business 8.7%. Given Oracle's announcement on March 20, I expect that spread to have significantly narrowed when looking at SAP's trailing 12 months results for the period ending March 31, 2007 vs. Oracle's trailing 12 month results for the period ending February 28, 2007. Oracle might even begin to gain share for the first time since the PeopleSoft announcement.

2007 Mar 23 02:13 PM