Court Case Prompts Microsoft Bid Admission

Microsoft, the world's largest software company, yesterday revealed that it held merger talks with German software rival SAP in what would have been the US group's biggest ever acquisition.

SAP, which is two places below Microsoft in the global software rankings, has a market capitalisation of about £28bn. This is about the same amount as Microsoft's cash pile of $50bn (£27bn).

A deal would have reshaped the software market by dramatically increasing Microsoft's interest in corporate software.

The Seattle-based software group and SAP broke with long-standing policies of not commenting on any merger or acquisition talks yesterday to pre-empt revelations at a court hearing in the US.

Rival Oracle, which is fight ing an attempt by the US department of justice to block a hostile bid for one of its other competitors, Peoplesoft, had obtained information about the Microsoft/SAP merger talks as part of its pre-trial discovery. It is expected to argue that such a merger would overturn its own dominant market position.

The department of justice, which brought the trial, has argued that Oracle's proposed acquisition would stifle com petition in the market for corporate software, which is dominated by Oracle, SAP and Peoplesoft.

In a statement released yesterday, Microsoft revealed that it had initiated preliminary discussions with SAP "late last year". It ended these discussions a few months ago "due to the complexity of the potential transaction and subsequent integration".

Instead, the two agreed to deeper integration in an an nouncement last month in which they formed a joint development partnership for internet services and reached a pact on cross-licensing patents.

Microsoft said yesterday that it had no intention of resuming the takeover talks.

Though the talks broke down in the spring without getting beyond a preliminary stage, relations between the two remain cordial.

At a recent press briefing SAP's chief executive, Henning Kagermann, said his group and Microsoft were "very good partners and will be in the future".

Mr Kagermann sought to play down the disclosure last night. "SAP, like all publicly held corporations, routinely evaluates potential opportunities to strengthen its leading position in the enterprise software market and the disclosure ... should be interpreted in this way."

Wall Street analysts were unsurprised that the talks had taken place. Nathan Schneiderman, analyst at Webush Morgan Securities, said: "Companies in the software industry, they all talk to each other all the time."

Torsten Schellscheidt, software analyst at WestLB, believed the companies had done the right thing in ending the talks. "For SAP it would have made little sense.

"Integrating the technology would have been very complicated."

The bid talks are part of Microsoft's strategy to lessen its dependence on its Windows operating system and increase its exposure to selling software to small and medium-sized firms, particularly in Europe.

SAP, which was founded by five former IBM executives in 1972, employs more than 29,000 people in 50 countries and is quoted on the Frankfurt and New York stock markets.