Will Oracle Take SAP to the Cleaners?

We already know that Oracle (Nasdaq: ORCL  ) will squeeze some cash out of longtime competitor SAP (NYSE: SAP  ) . The only question is, how much?

The courts have become an important force in the tech industry, reaching back to the infamous Microsoft (Nasdaq: MSFT  ) antitrust proceedings of the aughts with a recent highlight (or lowlight, depending on your perspective) in the thrilling conclusion of Intel (Nasdaq: INTC  ) vs. Advanced Micro Devices (NYSE: AMD  ) . Now it's Oracle's turn to profit from the grinding gears of justice at the expense of interloper SAP.

Oracle is suing SAP in Californian courts over claims of industrial espionage. The suit was filed in 2007, when Oracle accused a SAP subsidiary of downloading Oracle-owned software and documentation and then putting them to illegal use to support SAP's customers. In a somewhat unusual turn of events, SAP is not denying the charges, and has in fact shut down the offending operation. But Oracle wants more than $1 billion in damages, while SAP insists that there's no more than "tens of millions" at stake. It is, in other words, on.

The truth, as always, probably lies somewhere in between the two extremes. But if the courts come down with a verdict anywhere close to $1 billion, the case will make a major impact on both companies. Oracle's $8.3 billion of operating cash flow dwarfs SAP's $4.3 billion. (Neither one can hold a candle to IBM (NYSE: IBM  ) , where the company poured out $20.8 billion of operating cash flow last year.)

Will the windfall be significant to Oracle's already overflowing coffers, or will SAP provide mere pocket change to the database giant? In my view, the charges are serious but SAP's offending and now defunct subsidiary couldn't have stolen anywhere near as much support business from Oracle as the plaintiff claims. If I'm right, this will end up no more than a slap on SAP's wrist and a lengthy distraction.

But I'm not a lawyer, and I could be wrong. Ponder the implications in the comments box below.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Intel and Microsoft are Motley Fool Inside Value recommendations. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Oracle. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On August 09, 2010, at 5:04 PM, zoningfool wrote:

    Well, since it has been estimated in the past that TomorrowNow had captured approximately 1% of Oracle application maintenance/support revenue and since the time period TN was in operation as part of SAP spanned from January 2005 through October 2008, we could estimate the amount of support revenue lost to TN during that time to be approximately $390M (1% of the $39B would have generated without the loss of support revenue to TN (actual application-related support revenue being $37.5B). Of course this assumes linearity of revenues lost each quarter which is unlikely as sales would've ramped up initially then wound down as customers became uneasy about renewing their TN contracts once the lawsuit was filed.

    In any case, assuming actual damages of lost revenues approaching $400M as well as punitive damages and court costs, a payout of half a billion or more is not out of the question.

  • Report this Comment On August 09, 2010, at 7:39 PM, zoningfool wrote:

    Oops--correction--I added the wrong column on my Oracle spreadsheet--I tallied the TTM revenues instead of the quarterly revenues. Sorry. So, the numbers above should read as follows:

    Oracle's application support/maintenance revenues for the period during (January 2005 through October 2008) were approximately $12B, making revenues lost to SAP approximately $120M of compensatory damages--still much larger than the 'tens of millions' SAP thinks it should pay, especially considering court costs and punitive damages.

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