Microsoft and SAP entered merger talks

Microsoft and SAP initiated merger discussions late last year, but broke off talks several months ago for reasons of complexity, according to statements issued by the software makers on Monday.

Information related to the merger talks will be raised during courtroom discussions in the Oracle-PeopleSoft trial, which began Monday, Microsoft said. Oracle launched a hostile takeover bid for rival PeopleSoft last year that's being contested by the US Department of Justice. The information related to the merger talks was uncovered during the pretrial discovery process, the company said.

SAP said that Microsoft approached the company late last year to discuss the idea of a merger. "A few months ago, Microsoft ended these discussions due to the complexity of the potential transaction and subsequent integration. There are no intentions to resume these talks," according to a statement issued by Microsoft.

Microsoft's intentions in the business software market will play a key role in the Oracle case. Several Microsoft executives, including Douglas Burgum, a senior vice president of Microsoft's business solutions group, may be among the Justice Department witnesses who take the stand.

A merger between Microsoft and SAP would have bolstered Oracle's argument that the government's case discounts the competitive threat from both niche players and new entrants such as Microsoft. The software giant has reportedly given the Justice Department a sworn statement saying it has no plans during the next two years to move into the market at issue.

Oracle contends that the number of business applications vendors extends beyond SAP, Oracle and PeopleSoft and that there is healthy competition in the market.

Federal antitrust regulators, meanwhile, have argued that an Oracle-PeopleSoft merger would reduce the number of enterprise business software vendors from three to two, lessening competition and limiting customer choice.

Not long after their merger discussions ended, Microsoft and SAP announced that they plan to work more closely on integration of their software products using web services and that they would also cross-license certain intellectual property.

"SAP, like all publicly held corporations, routinely evaluates potential opportunities to strengthen its leading position in the enterprise software market, and the disclosure made today should be interpreted this way," Henning Kagermann, SAP's chief executive, said in a statement Monday.

A merger of the two companies would have created a potent combination--and likely would have invited antitrust scrutiny. Microsoft controls the market for desktop business software, and its Windows operating system runs on more than 90 per cent of the world's PCs. SAP leads the market for business software to manage human resources and financials systems in large companies.

"The potential merger of the two giants would have meant a dramatic restructuring of the information technology landscape, combining a near ubiquitous desktop presence with one of the leading packaged apps provider," said Steven O'Grady, an analyst at RedMonk.

"The resulting ripple effect would have had a dramatic impact on IT vendors up and down the platform-to-application continuum, and likely would have been of significant interest to governments on two continents," O'Grady said.

Microsoft launched its own business applications initiative several years ago, through the acquisition of Great Plains Software and Navision, two smaller software makers. So far, Microsoft sells its software only to smaller companies. The Redmond, Wash., powerhouse has said it has no immediate plans to compete with SAP in enterprise applications.

But most analysts expect Microsoft to gradually move into selling its business software to larger companies, increasing competition with SAP. Microsoft last week moved to strengthen management of its Business Solutions group by promoting Burgum, indicating a growing interest by the software maker in the business applications area.

Oracle and the Justice Department are expected to call on Burgum and other Microsoft employees to testify, presumably on the software giant's plans for entering the corporate market for business software applications.

Oracle is expected to call Cindy Bates, Microsoft’s general manager for small business, to the stand, according to court documents.

Mike Ricciuti writes for CNET News.com. CNET News.com's Dawn Kawamoto also contributed to this report.