Will Troubles at SAP Sink the Software ETF?

With low growth prospects in the U.S. and uncertainty building in Europe, earnings have been hard to come by for many firms. As a result, many arch-rival companies have engaged in price wars in order to subdue the competition and continue growing in this harsh environment. While most companies seek to beat the competition far and square, a few have taken more extreme measures to hold on to their market share.

Over the past few years, SAP (NYSE: SAP  ) -- the German software giant -- was allegedly using a subsidiary, TomorrowNow, in order to recover and copy huge reserves of Oracle (Nasdaq: ORCL  ) software and confidential data by pretending to be a client. This was accomplished by using a customized software tool called "Titan," which allegedly was used to plunder Oracle's website of patches, updates, fixes and other programs crafted for Oracle's paying customers, according to a report by the AFP. Eventually, authorities sniffed out this plan, and Oracle sued SAP for stealing its intellectual property. Much to the delight of Oracle shareholders, SAP lost and lost big; a U.S. jury has ordered the firm to pay out a record fine of $1.3 billion, the largest amount ever for a copyright infringement case [see all the ETFs in the Technology Equities ETFdb Category here].

The total fine represents more than half of SAP's total profit from all of last year, but about 33% of the company's total cash on hand. While this suggests that the German firm should have little trouble paying Oracle, the company has set aside a paltry $160 million in case it lost, suggesting that the hit on SAP's bottom line is likely to be severe in the short-term. "This will cost SAP moving forward," said analyst Rebecca Wettemann of Nucleus Research. "Oracle is going to be asking whether you want to buy from an innovator or someone who is stealing others' innovations." The resulting fine looks to impact ETF holders as well since SAP makes up the top weighting for the Merrill Lynch Software HOLDR (SWH), coming in at 19% of total assets. Due to this heavy weighting and the high concentration of HOLDRs, look for continued concerns from SAP to weigh on this fund [read Five Factors About HOLDRS Every Investor Must Know].

With this being said, some believe that the issue just represents a short-term problem for the company and that SAP is unlikely to lose out on much because of this setback. "Customers are sophisticated. They buy software that solves problems, and SAP solves a lot problems," said Patrick Walravens, an analyst with JMP Securities. "The implications from this are more around the way people do business, which is, you have to be really careful about infringing people's copyrights. Even if you think the damages from that behavior aren't very big, you can end up having to pay a lot of money." Furthermore, the other top holdings of SWH include Oracle at 15.5% so any losses from SAP that flow to ORCL will leave ETF investors in pretty much the same net position. This suggests that while the news isn't good for SAP, ETF investors appear to be more than adequately protected from any downturn in the company’s fortunes in both the short and long-term [see all the ETFs that offer exposure to SAP].

[For more ETF news sign up for our free ETF newsletter.]

More from ETFdb.com:

Disclosure: No positions at time of writing.

ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships. Read the full disclaimer here.

The Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1382714, ~/Articles/ArticleHandler.aspx, 9/1/2014 11:23:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement