The battle for ownership of the retail enterprise application market has begun, with both SAP and Oracle tendering offers for Retek. These events have pitted two competitive players against each other – Oracle’s $9.00 per share offer beat SAP’s offer by $0.50 per share. We believe this is only the beginning of the fight for ownership of Retek, its 200+ customers, and the retail application space at large.
Retek is the leading enterprise retail ERP vendor, with 200+ clients mostly clustered in North America, and has been a longtime Oracle partner and acquisition target. However, SAP’s all-cash offer ($8.50 per share bid – $496M – a 42 per cent premium at market close on February 25, 2005) pushed Oracle into a competitive battle for ownership of Retek and the retail enterprise application market. Oracle has offered $9.00 per share ($525M) for Retek, trumping SAP’s offer.
What does this mean to SAP?
SAP, which already owns and distributes the only retail ERP solution from a major enterprise application vendor, wants Retek to round out its offering by contributing retail optimization and point-of-sale (POS) technology. Should SAP win the battle for Retek, SAP will net the 200+ customers and a strong presence in North America where its current retail solution has faced sales challenges.
Furthermore, SAP (via NetWeaver) will support integration for both .Net and Java programming languages (a key differentiator in the deal) and also provide open database support for databases other than the ubiquitous Oracle.
SAP would also gain the opportunity to sell its HR and financial applications to Retek customers, who may not favor the recent Oracle/PeopleSoft acquisition. On the flip side, considerable product overlap exists between the two applications: both products offer ERP functionality, and rationalization may prove complicated.
Losing the battle for Retek would not leave SAP empty-handed, because it already offers a retail solution that is very strong in Europe. Therefore, SAP could acquire a point solution – a POS vendor and optimization vendor (e.g., i2, Manugistics) – that has retail capabilities and North American market presence. This option may not be appealing because Retek has the greatest brand recognition among retailers (not to mention the established 200+ North American customers, which SAP clearly needs). The other remaining option would be to acquire JDA, the key remaining direct competitor to Retek, which is not preferred due to JDA’s technology and mixed bag of acquired products.
What does this mean to Oracle?
Currently, Oracle does not have a retail ERP offering and has been a longtime partner with Retek. Because approximately 80 per cent of Retek’s clients run on Oracle’s database and because Retek is primarily developed in J2EE-compliant Java, Oracle can absorb the Retek technology stack relatively quickly should Oracle win the Retek bid. Moreover, since Oracle does not offer a retail ERP application, there is zero functional overlap between existing Retek and Oracle products, and this will not force customers to choose a migration path (off one product to another that may or may not be Oracle).
We note that SAP does have overlap in supply chain, merchandise, and store management, which may give Retek customers the opportunity to evaluate the market and select something other than SAP. Given the lack of functional overlap, Oracle should be able to maintain Retek’s current development and release schedule with little or no code base rewrite. Oracle would also gain from its recent acquisition of PeopleSoft, because about 35% of Retek’s customers run PeopleSoft applications. This combined position could enable Oracle to obtain preferred-supplier status with customers that own Oracle databases and PeopleSoft applications. Finally, should Oracle win the deal, Oracle would be able to leverage its relationship with Accenture, which is a services partner of both Oracle and Retek and the primary systems integrator delivering Retek implementations.
Should Oracle lose the bid for Retek, its only option would be to acquire a primary competitor to Retek such as JDA – purely for the retail knowledge, customers, and code base. We believe another option might be for the company to do nothing while building its own retail solution, or ceding the retail industry to other players.
As in any acquisition, both SAP and Oracle will require the time needed to integrate sales and development operations, as well as eliminate redundant back-office operations. However, Oracle will be doing this on the heels of the Oracle/PeopleSoft acquisition, which could add a further layer of complexity.
What does this mean to the market?
The retail industry (also going through consolidation phases – e.g., Sears/Kmart, Federated/May) is finally getting the attention of major packaged application vendors as an untapped market. However, this does not mean all retailers will flock to packaged offerings, since some retailers prefer homegrown merchandizing systems (with all the support and development burdens); they somewhat erroneously believe such systems will provide competitive differentiation, enabling them to compete more effectively, as Wal-Mart was able to do with its homegrown system.
For those retailers that understand the value and desire packaged applications, these recent events are good news, because they will do the following:
1) stimulate vendors to update their retail solutions, providing increased market competition;
2) provide a greater number of solutions from financially viable vendors; and
3) enable potential customers to take advantage of integration into other back/front-end systems such as HR, financials, and CRM.
What does this mean to current Retek customers?
Retek customers are caught in the middle for now and must wait and see which way the deal goes to determine a course of action. In the interim, retailers should do a “performance check” on their existing Retek solutions to determine if Retek has truly met their needs, should a migration decision be required. Moreover, current/future Retek investments should be placed on hold until the deal settles, since the two buyers will have two different strategic directions. This may not be the preferred choice; however, it will not waste precious IT budget. Users that are unable to wait should minimize exposure by reducing scope to control product and service spending.
The Retek shareholder is the clear winner in this bidding war. Only the amount to which both Oracle and SAP are willing to spend will determine the winner between the two bidders, and we believe there will be additional bids to come in this battle for the retail market. Retek customers will win either way, because the long-term financial viability of Retek will no longer be a concern. Irrespective of which firm wins, Retek customers’ IT strategy and preferred-partner relationships will require review.
Bottom Line: Retek users should put Retek upgrades on hold until the bidding war for Retek is over and a winner has emerged. Users of legacy systems should watch this deal closely because it will bring new application options to the table for retailers.
Business Impact: Retail is now entering a new phase of enterprise application options, which will decrease costs and increase opportunities for packaged software.