IBM-SAP combo not in the cards - exec

Big Blue's software strategy chief says IBM will stick to its knitting.

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By Jon Fortt, senior writer

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SAN FRANCISCO (Fortune) -- At a table in Las Vegas, a town fueled by big bets, IBM software chief Steve Mills outlined one he doesn't want to make: Buying application provider SAP.

"We're not changing our strategy," said Mills, who guides Big Blue's software strategy for CEO Sam Palmisano. "We have consistently shied away from going deep into the applications space," he said last week at a series of business meetings.

A software veteran with a boxer's build, Mills is crushing a few dreams here. As soon as word of Oracle's blockbuster bid for Sun Microsystems spread last month, analysts began to buzz about the aftershocks and a favorite fantasy involved wedding bells for IBM (IBM, Fortune 500) and SAP (SAP).

That speculation goosed shares in the German software maker up above $41 last month before they settled back down under $38. "As Oracle opens more fronts against IBM, we believe IBM may eventually decide to move into the applications business in a big way, perhaps by acquiring SAP," wrote JMP Securities analyst Patrick Walravens.

On paper, the two were made for each other. IBM, with big-iron assets like Websphere, DB2 and Cognos, lays much of the foundation for the world of Internet-friendly business software. SAP, with applications that can manage supply chains and customer relationships, builds on that foundation.

There is, of course, the matter of price. These would be expensive nuptials; SAP's market value sits at just under $50 billion, and shareholders would certainly demand a premium. But with IBM valued at nearly $135 billion, it could afford the dowry. (SAP cofounder Hasso Plattner has said that IBM, Google (GOOG, Fortune 500) and Microsoft (MSFT, Fortune 500) are the only realistic suitors in that category.) Together, IBM and SAP would offer a soup-to-nuts portfolio of the software that companies need to run their businesses, and grab a larger share of corporate technology spending.

Other tech titans are certainly making such unorthodox moves while angling for a bigger chunk of IT budgets.

Consider some of the most recent shifts in the landscape: Hewlett-Packard (HPQ, Fortune 500) bought EDS, complicating its relationships with other service providers but staking a claim on more revenue. Cisco has entered the server business, rankling partners like HP and IBM, but potentially boosting its own sales.

And Oracle's purchase of Sun (JAVA, Fortune 500) fits the same mold: Rather than sell his software on other people's servers, CEO Larry Ellison thinks that by offering chips and hardware packaged with databases and applications, Oracle (ORCL, Fortune 500) can keep more money for itself.

IBM has been gobbling up companies too, but Mills said he's wary of getting too greedy. He describes his business as an ecosystem that thrives when smaller companies view IBM as a friend that profits by helping them sell their software on top of his. Buying up a big application provider would threaten that chemistry.

"For every dollar of revenue that SAP books, there's five dollars of services, hardware and other software associated with that SAP system," Mills told me. "You really have to be careful about competing with your ecosystem. Because the modest amount of revenue and profit you might be able to get from an acquisition is likely to be dwarfed by the amount that you lose as you give up those ecosystem relationships."

"That," I observed, "is a solid argument for why IBM shouldn't buy SAP."

He chuckled. "Putting aside a bunch of other arguments like - 'Man is that expensive!' - yes, you're right." To top of page

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