Microsoft also briefly pondered taking a minority stake in PeopleSoft to help it fend off Oracle. "Thinking about this PeopleSoft bid by Oracle made me wonder if we should approach them and suggest a minority investment to bolster their independence in return for a modest platform commitment," Microsoft chairman Bill Gates said in an e-mail to CEO Steve Ballmer the day after Oracle announced its PeopleSoft bid.
Microsoft senior vice president Doug Burgum discussed his company's reasoning as a government witness at the Oracle antitrust trial on Wednesday. Oracle wants to acquire PeopleSoft, a deal the U.S. Justice Department wants to block on the grounds that it would harm competition in the market for business applications software.
Oracle says the Microsoft intends enter the market for "high-function" business applications, a move that would check its market power if it combined with PeopleSoft. Oracle has called out Microsoft's talks with SAP, Oracle largest rival in the applications market, as proof of Microsoft's desire to compete there.
Questioned about the SAP talks, Burgum said that Microsoft executives, including Ballmer and Gates, began considering a merger with the German software company last June after Oracle launched its hostile bid for PeopleSoft. They feared that Oracle, which competes with Microsoft in database software market, would entice PeopleSoft's customers to switch from Microsoft's database product to Oracle's if the two companies combined, Burgum said. PeopleSoft applications currently work with both Microsoft and Oracle databases, while Oracle works with only its own.
"Regardless of the outcome, the dynamics of the industry have changed," Microsoft executive Cindy Bates said in an e-mail she sent to Ballmer, Burgum and Gates last June. "We should think proactively in determining our fate, as no doubt the folks in Armonk (IBM) are doing."
Such a move could drive IBM, another major database competitor, to focus its sales efforts on customers of SAP or to buy SAP, Microsoft's executives conjectured. That would put further pressure on Microsoft's database business, unless Microsoft bought SAP instead, according to a confidential Microsoft document submitted as evidence in the trial.
Microsoft cited a potential "halo effect" on its database business as one reason to buy SAP, according to that document. Elaborating on the halo effect, Burgum said that owning SAP could help Microsoft sell more databases to SAP customers, possibly boosting Microsoft's revenue in that business.
He added that Microsoft planned to let SAP customers continuing using rival databases even if it bought the company--a factor that added to the complexity of the deal and ultimately led Microsoft to back away from it. The realisation the IBM had no plans to buy SAP also led Microsoft to cease its talks with the German company earlier this year.
In addition to its addressing its database concerns, SAP was attractive acquisition target because it would give Microsoft an instant leadership position in the applications market targeting Fortune 500 companies, the document stated. But when the deal fell through, Microsoft gave up all intentions of competing in that space, Burgum said.
Throughout his testimony, Burgum stressed that Microsoft had no intention of competing with SAP, Oracle or PeopleSoft to supply large, complex companies with applications software once it abandoned the SAP deal. Instead, it's focused on selling to so-called mid-size businesses, which Microsoft defines as companies with less than 500 employees, Burgum said.
It would be too expensive for Microsoft to go it alone and enter the "high-function" market without SAP, Burgum said. "The build option was not something that was ever considered," Burgum said.
Burgum's boss Steve Ballmer see more profits in selling to smaller companies and has asked him to focus on that, Burgum added. "Microsoft's strength is low-price, high-volume packaged software, (serving) hundreds of millions of customers--not tens of thousands of customers," as SAP and Oracle do.
A PeopleSoft-Oracle merger would intensify competition between SAP and Oracle in the business software market, according to an SAP executive who testified earlier Wednesday.
Richard Knowles, SAP's vice president of operations for North America and an Oracle witness, said he believed that if combined with PeopleSoft, Oracle would offer more competitive prices when bidding against SAP.
The three companies are the largest suppliers of computer programs designed to streamline corporate tasks, such as billing, customer service and inventory-tracking.
The U.S. Justice Department wants to block Oracle's proposed buyout of PeopleSoft, charging that it would give the company the power to raise prices. Oracle contends that it needs PeopleSoft to take on SAP, its larger rival in the multi-billion dollar applications market.
Analysts say SAP could benefit from a buyout of one of its closest rivals because of the risks involved in such a larger merger. Executives of the Germany software maker have publicly criticized the Justice Department's case, disagreeing with its view of the market.
The trial opened June 7 with the Justice Department presenting its case. Testimony has revolved around representatives of large companies--DaimlerChrysler, Verizon and others--that use the kind of software Oracle and its competitors sell. The Justice Department's witnesses have expressed concern that software implementations would cost millions of dollars more in a market without PeopleSoft, and current PeopleSoft customers have said they fear Oracle will stop supporting their software, making multimillion-dollar new systems a necessity.
Oracle is expected to present its case after the Justice Department finishes. The nonjury trial is expected to last about four weeks.
