Why Sybase Will Help SAP Gain Ground on Oracle

It took SAP's co-CEOs Bill McDermott and Jim Hagemann Snabe just three months to make their big move: The enterprise software giant announced on May 12 that it's buying software maker Sybase for $5.8 billion. The two execs, who emerged on top after a management shakeup at the German company, inherited plenty of problems, including declining sales and profits, loss of market share and an underperforming stock price. Those deficiencies were merely the symptoms of a deeper issue with product development, where SAP (SAP) had missed the boat in critical areas such as mobility and "cloud" computing.

SAP's problems, however were a source of glee for Oracle (ORCL) CEO Larry Ellison, who openly taunted SAP over its weak performance and turmoil in the executive suite. "Every quarter we grab huge chunks of market share from SAP," said Ellison in Oracle's earnings report in March. "SAP's most recent quarter was the best quarter of their year, only down 15 percent, while Oracle's application sales were up 21 percent. But SAP is well ahead of us in the number of CEOs for this year, announcing their third and fourth, while we only had one."

Now, the move to buy Sybase should help SAP in several ways. With the deal, McDermott and Hagemann Snabe have put their imprint on the company and shown they're serious about turning it around. McDermott, the company's first American-born CEO, has run operations for the last few years. Hagemann Snabe was previously in charge of product development. The Sybase deal reflects their backgrounds. Predecessor Leo Apotheker was a sales veteran who tried address the company's problems through quicker fixes, such as raising prices during a recession.

Moving Target

Sybase gives SAP more heft in mobile applications for businesses. SAP has been late to this market, which is surprising since Apple (AAPL) is a key customer, but better late than never. Sybase also has strength with a technology SAP refers to as in-memory computing, a technique that speeds up processing speeds by conducting operations in the memory of the computer, rather than sending the task to a separate processor.

SAP is betting that in-memory computing will help it develop an edge over Oracle in the database market. Oracle has nearly a 50% market share, according to a report issued last month by Citigroup.

But Oracle is a moving target. Its acquisition of Sun Microsystems closed early this year, giving Oracle the Java operating system, dominance in Linux, and Sun's workstations. Now, Oracle looks more like IBM (IBM) and HP (HPQ), which make software and hardware.

Oracle will use that capability to develop what it refers to as "appliances" that combine its software with specialized hardware. That may help it develop an advantage in increasingly complex industries such as financial services and health care, where off-the-shelf hardware may no longer cut it, according to Citigroup, which rates Oracle a buy.

A Useful Countermeasure

SAP is a much more limited -- the charitable word might be "focused" -- company. It's a software applications maker. But that's just one part of Oracle's business. So, SAP absolutely must have the best technology in the market, at the very best price.

The Sybase deal adds to its arsenal, at a time when Oracle has its hands full with the integration of Sun. Oracle needs to fix the Sun's declining workstation business. It also needs to bring the down cost and complexity of Sun technology for the sake of its customers. Companies that use Sun equipment must use Sun-approved products in their network, and those products must be installed by Sun-approved engineers. Oracle needs to make life simpler for Sun users.

While Ellison is busy wringing synergies out of the Sun acquisition, SAP's McDermott and Hagemann Snabe need to quickly make the most of the Sybase deal. Who'll get the last laugh?