The consequence of SAP’s $1.3 billion fine

by Abhinna Shreshtha    Nov 29, 2010

Oracle wins 1.3 billion fine against SAPLast week, SAP (NYSE: SAP) was ordered to pay $1.3 billion in damages to Oracle (NASDAQ:ORCL), a massive sum; making it the largest amount ever paid for software piracy.

As one of the largest software companies in the world, SAP is quite capable of paying the $1.3 billion fine, however it will definitely have repercussions on its budgets for the coming year. Just how the German giant decides to balance this unexpected expenditure will be interesting. An obvious conclusion is that the company will cut down its M&A activity.

SAP is not as big a spender in the acquisition market as compared to Oracle, which has already spent around $9,000 million in snapping up companies this year alone. However, it is still known to make tactical acquisitions when needed, an example being Sybase, which it bought for $5.8 billion earlier this year. “Although SAP can afford to pay the full figure, it will be painful and could affect its product development or acquisition plans. Whatever the size of the final fee Oracle cannot lose,” opined Angela Eager, senior analyst at Ovum. It is likely that SAP will decide to postpone any planned acquisitions at least till the situation becomes clearer.

In an interview to Bloomberg BusinessWeek in June, co-CEO of SAP Jim Hagemann Snabe had said that the company was searching for more acquisitions and were open to ‘larger acquisitions’. However, he maintained that the largest part of SAP’s future growth would be organic.

So far this year, SAP has spent $1.6 billion on R&D, with a R&D quotient (the amount spent on R&D as a percentage of total revenue) of 14.8 percent in the first nine months of 2010, 0.2 percentage points less than last year. An enormous amount that backs Snabe’s statement that organic growth is more important for the company. With the management strongly backing R&D, it is just possible that they might not feel the need to spend on inorganic growth. What could possibly happen is that to compensate for its inactivity when it comes to M&A, SAP could increase its R&D budget a bit and pressurize its internal teams to innovate. This could remove the need for large cash outflows. Of course this is all mere speculation; and the company might simply take the risk of taking the legal battle forward on the chance that the fine might be reduced.

In a statement issued by SAP, the company did not rule out the possibility of an appeal. “We will pursue all available options including post-trial motions and appeal if necessary,” read the statement. But a lengthy court battle will only keep the issue alive, something that SAP should not want right now, especially after it has already accepted that it was at fault. However, Eager feels that it remains a strong possibility. “The figure has not been finalized, and so the legal battle may be far from over,” she explained.

In the end it comes down to how the company’s board wants to balance between costs and competitiveness. But, it is likely that we will see a change in SAP’s overall strategy in the coming year.