The HP, Oracle, SAP Dance

Lead Analyst: Cal Braunstein

Hewlett-Packard Co. announces reorganization and write-downs and gets good news from the courts that it has won its Intel Corp. Itanium lawsuit against Oracle Corp. Oracle must now port its software to Itanium-based servers. In other news, Oracle agreed to a $306 million settlement from SAP AG over their copyright infringement suit. However, the soap opera is not over – Oracle may still push for more.

Focal Points:

• CEO Meg Whitman, in her continued attempt to turn the company around, is writing down the value of its Enterprise Services business by $8 billion and making management changes. HP paid $13.9 billion to acquire EDS back in 2008.  John Visentin, whom former HP CEO Leo Apotheker anointed to manage the Enterprise Services behemoth a year ago, is leaving the company.  Mike Nefkens, who runs Enterprise Services in the EMEA region, will head the global Enterprise Services group, which is responsible for HP's consulting, outsourcing, application hosting, business process outsourcing, and related services operations. Nefkens, who came from EDS, will report to the CEO but has been given the job on an "acting basis" so more changes lie ahead. In addition, Jean-Jacques Charhon, CFO for Enterprise Services, has been promoted to the COO position and will "focus on increasing customer satisfaction and improving service delivery efficiency, which will help drive profitable growth." HP services sales have barely exceeded one percent growth in the previous two fiscal years. HP further states the goodwill impairment will not impact its cash or the ongoing services business. The company also said its workforce reduction plan, announced earlier this year to eliminate about 27,000 people from its 349,600-strong global workforce, was proceeding ahead of schedule. However, since more employees have accepted the severance offer than expected, HP is increasing the restructuring charge from $1.0 billion to the $1.5-1.7 billion range. On the positive front, HP raised its third-quarter earnings forecast.
• HP received excellent news from the Superior Court of the State of California when it ruled the contract between HP and Oracle required Oracle to port its software products to HP's Itanium-based servers. HP won on five different counts: 1) Oracle was in breach of contract; 2) the Settlement and Release Agreement entered into by HP, Oracle and Mark Hurd on September 20, 2010, requires Oracle to continue to offer its product suite on HP's Itanium-based server platforms and does not confer on Oracle the discretion to decide whether to do so or not; 3) the terms "product suite" means all Oracle software products that were offered on HP's Itanium-based servers at the time Oracle signed the settlement agreement, including any new releases, versions or updates of those products; 4) Oracle's obligation to continue to offer its products on HP's Itanium-based server platforms lasts until such time as HP discontinues the sales of its Itanium-based servers; and 5) Oracle is required to port its products to HP's Itanium-based servers without charge to HP. Oracle is expected to comply.
• Oracle said it agreed to accept damages of $306 million settlement from German rival SAP to shortcut the appeals process in the TomorrowNow copyright infringement lawsuit. Oracle sued SAP back in 2007 when it claimed SAP's TomorrowNow subsidiary illegally downloaded Oracle software and support documents in an effort to pilfer Oracle customers. SAP eventually admitted wrongdoing and shut down the maintenance subsidiary. In November 2010, Oracle had originally won a $1.3 billion damages settlement, the largest ever awarded by a copyright jury but it was thrown out by the judge, who said Oracle could have $272 million or could ask for a retrial. To prevent another round of full-blown trial costs, the warring technology giants have agreed to the $306 million settlement plus Oracle's legal fees of $120 million; however, Oracle can now ask the appeals court judges to reinstate the $1.3 billion award. SAP stated the settlement is reasonable and the case has dragged on long enough.

RFG POV: HP suffers from its legacy product culture and continues to struggle to integrate services into a cohesive sales strategy. The company does well with the low-level technical services such as outsourcing but has not been able to shift to the higher margin, strategic consulting services. While the asset write-down was for the EDS acquisition, HP had its own consulting services organization (C&I) that it merged with EDS and atrophied. It took IBM Corp. more than 10 years to effectively bring its products and services sales groups together (it is still a work in progress). RFG therefore thinks it will take HP even longer before it can remake its culture to bring Enterprise Services to the level Meg Whitman desires. The HP Itanium win over Oracle should remove a dark cloud from the Integrity server line but a lot of damage has already been done. HP now has an uphill battle to restore trust and build revenues. IT executives interested in HP's Unix line combined with Oracle software should ensure that the desired software has been or will be ported by the time the enterprise needs it installed. The Oracle SAP saga just will not go away, as it is likely CEO Larry Ellison enjoys applying legal pressure to SAP (especially since the fees will be paid by the other party). It is a distraction for SAP executives but does not impair ongoing business strategies or plans. Nor will the outcome prevent other third parties from legally offering maintenance services. IT executives should not feel bound to use Oracle for maintenance of its products but should make sure the selected party is capable of providing a quality level of service and is financially sound.