Escaping the jaws of Microsoft

newsmaker Since taking the reins of Germany's SAP last year, Henning Kagermann has hardly had a dull moment.

Kagermann assumed the role of chief executive officer at the world's third-largest software company in May 2003 after sharing the title for five years with SAP co-founder Hasso Plattner. But a month after Plattner moved aside, SAP's largest competitors sought to unite against the company.

First, rivals PeopleSoft and JD Edwards agreed to merge. A few days later Oracle, SAP's top competitor, responded with an unsolicited bid to buy PeopleSoft -- a US$7.7 billion deal that's since been contested by the government as anticompetitive.

The PeopleSoft acquisition bid sent waves through the IT industry and landed Oracle in court. But it also spurred Microsoft to approach SAP about a merger -- a negotiation the companies disclosed during last month's Oracle anti-trust trial. The talks didn't get very far, but their existence underscored just how much this segment of the software industry is in upheaval.

Kagermann recently talked to CNET News.com about his brief courtship with Microsoft, his competitor's anti-trust woes, and why it's so tough to innovate when a company has 20,000 chief information officers to keep happy.

Q: A lot of people were surprised to learn that SAP talked to Microsoft about a merger. How serious were the discussions?
A: They approached us, and we listened, but because there was no deal on the table, I cannot answer if we were serious or not. I think that starts once you have an offer.

What was the deal breaker?
We were exploring what could be the potential benefit (of a merger) to customers. It was stopped in the early phases through exploring the question of whether we can both promise significantly more value to both sets of customers.

Is there something particular right now in the enterprise software business that's driving this apparent merger mania? One of the disclosures coming out of the Oracle anti-trust trial is that (Oracle CEO) Larry Ellison has a long shopping list. It seems that this is now going to be the thing to do for 2004-2005. How do you see the world shaking out?
I think that because of this new architecture that is emerging -- service-oriented architectures around Web services -- that the position and the way companies present their value will change. It's obvious that people question themselves. Companies -- SAP included -- are asking themselves what are the spots of hottest value in the future and how well are they positioned there. I think every company in IT is reassessing its strategic position. I strongly believe this is the driver behind (this acquisition trend).

Is it inevitable then that the enterprise software market is going to be reduced to an even smaller number of key players?
I believe there will be a few large players with a comprehensive offering that enterprises -- especially the larger ones -- will more and more look to because the more we support their core business processes, the more strategic the relationship becomes. It will reduce to a number -- I don't know if it is three, four, five, whatever -- not one, but a few.

I don't think there is space for many mid-size companies because either they become the more complete solution provider, or they stay in a niche and they cannot generate enough revenue to make the jump to the large ones. This middle size, I think, will go out.

Where does all of this leave SAP? Do you need a merger partner?

I think every company in IT is reassessing its strategic position.

We want to be one of the larger ones. We think we have the position. We have the market share, and we have the customer base, which doesn't mean you have to do everything. But we get more and more clients who now have 50, 60, 70 percent of their business running on SAP. It means there's a push for us to complete our enterprise applications.

Speaking of Larry Ellison, what do you think European regulators will do if Oracle wins its case against the US Justice Department?