Microsoft + Yahoo! or Microsoft + SAP? | AMR Research

Microsoft + Yahoo! or Microsoft + SAP? | AMR Research

Randall Stross penned an interesting column for the February 24 New York Times, suggesting that Microsoft abandon its plans to acquire Yahoo! for $44.6B. Instead, the office automation giant should pony up and buy SAP for a premium north of the ERP leader’s current $59B market cap.

His argument was that SAP strengthens Microsoft’s presence in the corporate software market whereas adding Yahoo! to Microsoft’s online business means combining two weaklings who, together, can’t stop Google. In the piece, MIT professor Michael Cusumano described Yahoo! as an “old-style Internet asset, in decline, and at a premium.”

I don’t like either idea

The Yahoo! purchase is a dumb move. I don’t see the value or the long-term opportunity. There seems to be an inverse correlation to Microsoft’s move and Google’s market cap, though it’s not Yahoo! fever that has been causing Google’s shares to drop. Google’s market valuation has dropped 38% from the high of $747.24 reached last November. That’s a loss of $83B in market cap. Google has lost more value the past few months than SAP is currently worth. The market is reacting negatively to reports that the paid-click business is slowing.

SAP is a well-run company with a great customer base. The bulk of its revenue, however, is generated from an expensive direct sales and service force. This is counter to Steve Ballmer’s strategy of selling business applications through a channel.

While the combination would be formidable, especially against Oracle, I’m not sure that the investment would yield good ROI. Sure, SAP should continue to grow in low double digits for the foreseeable future, but I don’t see any new cross-sell or upsell opportunities for Microsoft at the upper end of SAP’s base. Companies already have a huge investment in Office and Outlook—how many more seats do they need? Can you see CIOs replacing their DB2 or Oracle installations (and skilled database administrators) with SQL Server?

Is ERP old-style, too?

While Professor Cusumano referred to Yahoo! as “old-style,” I wonder whether we will come to see ERP in the same way. Pursuing SAP would be a logical move, but may not be a leap ahead. Consider three scenarios.

Scenario No. 1—ERP as a service

SAP Business ByDesign is a well-designed product suite built using leading-edge technology. That said, it’s not worth buying all of SAP to get this product, even if its represents the embodiment of the original Project Green.

The software has been going through a slow, controlled rollout. While SAP hopes to have 1,000 implementations by the end of the year, I’m not sure it can sell sophisticated software over the web. While there had been early talk about building a new channel, no one at SAP has been able to convince me that there is enough money in it for resellers. Ultimately, though, Business ByDesign will become the successor to SAP Business Suite. The question is when?

Scenario No. 2—SOA as the new backbone

As I wrote last week, IBM’s Bob LeBlanc recently compared industry-standard PC buses to service-oriented architectures (SOAs). If SAP supported an industry-standard enterprise service bus, would customers use it to build a plug-and-play enterprise backbone using best-of-breed software? Is there a disruptive SOA play for Microsoft that would allow it to sell its business applications into other ERP vendors’ bases?

Scenario No. 3—The network as ERP

About a decade ago, we began writing about the concept of trading exchanges, in which customers and suppliers would move their ERP-based business processes to a shared network. A lot has happened since then. Companies like E2open and One Network Enterprises are moving more and more collaborative processes onto a shared network.

One Network’s Greg Brady recently shared some of the work he’s been doing linking grocers and suppliers. He believes that one day his network could become a lower cost ERP system shared by all of the nodes. In his view, why would companies need to have their own, on-premises ERP systems if the core transactions, as well as the planning and analytics, have moved to the network? While that might not happen in our lifetime, it still qualifies as a bold idea ... even 10 years after we first wrote about it.

What do you think: Yahoo, SAP, or other?

Am I missing the secret sauce for a Microsoft-Yahoo stew? Do you agree with the Times and MIT perspectives that SAP would be a better bet, albeit it maybe at twice the price? Do any of my three scenarios make more sense for Steve Ballmer as he looks ahead for Microsoft? Where else might he look? As always, I welcome your feedback and ideas—brichardson@amrresearch.com.