November 24, 2010 / 11:41 AM / in 7 years

Oracle ruling slams SAP's reputation

FRANKFURT/NEW YORK (Reuters) - SAP AG, slapped with a record $1.3 billion fine for stealing Oracle’s software, faces the task of salvaging its tarnished reputation and convincing U.S. clients not to flee to Oracle or International Business Machines Corp.

<p>A worker adjusts a spotlight at the SAP booth in preparation for the CeBIT fair in Hannover February 28, 2010. REUTERS/Thomas Peter</p>

While SAP may get the damages reduced through an appeal, a prolonged legal battle could hurt its credibility and give rivals, which also include Microsoft Corp and Salesforce.com Inc, an advantage.

With U.S. Federal investigators looking into a possible criminal case against SAP, analysts see serious consequences beyond the actual fine.

“Even though SAP may appeal the judgment, the huge amount should be negative for the stock price and, will weaken SAP’s position in the U.S.,” said Jacques Abramowicz, analyst at Silvia Quandt research.

“Oracle will use the decision as a marketing tool, wielding the moral cudgel every time new contracts are negotiated.”

SAP and Oracle’s three-week courtroom drama captivated Silicon Valley with a slew of high-profile executives testifying.

The verdict, announced after the market closed on Tuesday, sent SAP shares down 1 percent to 35.84 euros, one of the biggest losers in Germany’s blue-chip index DAX. Oracle, on the other hand, rose 2 percent to $27.74.

SAP, based in the small town of Walldorf near Heidelberg, is considering appealing the decision by a U.S. district court jury in Oakland, California. Analysts said the fine was the biggest-ever related to software patent infringement.

The verdict and the maelstrom of negative publicity that followed are just the latest troubles for SAP. The company was criticized for angering customers with fee hikes in the midst of a recession, and former CEO Leo Apotheker -- now the head of Hewlett-Packard Co -- left abruptly in February.

“This is a bad day for SAP that punctuates some rather poor decision-making over the past few years,” said Wells Fargo senior analyst Jason Maynard.

“From this episode of corporate theft to the ill-timed, recession-period maintenance price hikes, and then the sudden ousting of CEO Leo Apotheker, we think SAP needs to demonstrate better leadership going forward.”

HIT TO REPUTATION, WALLET

SAP has acknowledged that its TomorrowNow subsidiary in the U.S. had wrongfully downloaded millions of Oracle’s files, and co-CEO Bill McDermott took the stand and apologized.

With the admission of liability, the main issue before the jury was how much was owed in damages. SAP said it was no more than $40 million, while Oracle sought at least $1.65 billion. Analysts had figured it would be somewhere in between.

Most say SAP won’t have a problem paying up or servicing debt, as the company had around $3.8 billion in cash as of the end of the third quarter and enjoys a healthy cash flow.

Some estimated the $1.3 billion award represents a loss of around $1 to $1.20 per share for SAP stockholders, but most forecast a smaller payment after an appeal.

More serious than the amount of fine, however, is the hit to its reputation, particularly risky in a business that is more about multiyear relationships rather than one-off sales.

Oracle sales staff could use it as one factor in persuading clients not to deal with SAP.

“There may be some reputational damage to sales, and government agencies in the U.S. may be particularly sensitive to the trial’s outcome,” UBS analyst Michael Briest said.

In addition to the trial, SAP faces a possible probe by U.S. officials. The government is conducting a criminal investigation into the events surrounding TomorrowNow, but has not disclosed details. SAP said it has been cooperating with Department of Justice investigators.

PRESSURE ON MANAGEMENT

Analysts said the case was yet another result of SAP’s troubled management, as seen in the sudden departure of former Apotheker. Apotheker stayed away from the trial, with HP refusing to accept a subpoena.

One of SAP’s biggest missteps in recent years was an across-the-board price hike during the recession, a move it reversed after complaints from a large number of customers.

Tuesday’s outcome was a vindication of sorts for Oracle and its chief executive, Larry Ellison, the flamboyant billionaire famous for his no-holds-barred attacks on SAP and other rivals.

But Cross Research analyst Richard Williams said there was also a risk Oracle’s “scorched earth” strategy could alienate clients.

“The harsh tactics evident in the lead-up to the trial and its conclusion could backfire, creating sympathy for SAP in the minds of key enterprise customers that both companies vigorously compete for to win large deals,” he said.

Editing by Edwin Chan, Phil Berlowitz

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