SAP-Commerce One Partnership Sparks Merger Gossip

Oh, how they'll talk. It might not ever come true, but among the insatiable gossips who populate Wall Street, it's getting its share of attention.

It's the notion that German software maker SAP(SAP) will eventually buy Pleasanton, Calif.-based business-to-business software company Commerce One(CMRC). All this because the two firms in June announced a marketing and product alliance to sell their software together. Oh, and the fact that the partnership involved SAP investing $250 million for a 2.5% stake in Commerce One.

Neither firm would comment for this story, but they've dismissed the idea of a merger in the past, and industry observers say it's highly unlikely at this point.

Chatter

But just like in your neighborhood, when you start getting friendly with someone across the way on Wall Street, people will talk.

"I'd say nobody's talking about it, if you weren't the fourth person today to ask me that question," Ben Smith, a consultant with A.T. Kearney, says about the possibility of a merger. But Smith doesn't see a deal any time soon. (His firm hasn't done consulting for SAP or Commerce One.)

He says a merger wouldn't be characteristic of either company. SAP, like its archrival Oracle(ORCL), has traditionally developed its own software instead of grabbing it through acquisitions. And Mark Hoffman, a West Point grad who co-founded Sybase(SYBS) before launching Commerce One's predecessor, isn't seen as the selling type.

Still, "the thing with Commerce One and SAP is that you can't rule it out," says Nick Moore, a senior analyst at investment firm Jurika & Voyles in Oakland, Calif. "They are publicly working together, so it's not hard to see how a rumor like that would begin. And it's not completely without credibility either." (His firm doesn't have a position in Commerce One or SAP, but Moore follows the software sector.)

Reasons in Favor

There are plenty of reasons why a deal would work: Commerce One has quickly gone from being perceived as a B2B leader in Wall Street's eyes to walking in the shadow of archrival Ariba(ARBA). Commerce One's stock, at around 50, is nowhere near its split-adjusted high of 165 1/2, seen last December.

Then there's the fact that SAP and Commerce One have already made some fast strides together. Last week, they announced two online exchanges powered by their combined software. Online exchanges are marketplaces on the Internet where businesses can buy and sell goods, sort of like virtual corporate bazaars.

"These guys are going to market together quickly," says Smith, the A.T. Kearney consultant. "The fact that this software is owned by SAP and someone else -- which isn't typical of SAP -- shows that SAP is serious about working together with Commerce One."

Alone or Together?

Another factor fueling speculation: Both companies have said no one in e-commerce can go it alone.

"I've got to believe that if the partnership really starts kicking, it would make a lot of sense," says Drew Cupps, manager of the $800 million (SENTX)Strong Enterprise fund, which holds Commerce One as its second largest position. "Why would SAP not want to own the whole relationship? It's the logical extension on the entire back end that they've put in place. It makes sense if they can see a big future for the combined product."

One reason why SAP might not want to own Commerce One, though, could be the cost. Currently, Commerce One has an $8 billion market cap. That's well off the $26.8 billion market cap the company saw at its high last year. So even if SAP agreed to an extremely generous 100% premium over the company's current stock price, that would be $10 billion less than the company was once worth. But from SAP's outlook, it might be $10 billion too much.

So realistically, a deal looks unlikely, for now. But that may not stop people from talking.

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