When software giant SAP announced that it had agreed to buy Retek, a specialist in retail systems, the first reaction of most observers was: "Who?" Although the company was ranked the fourth fastest growing software company in the world in the Information Age 2002 league table, its recent performance has been staid, and its strong position in the retail sector is not reflected in a wider profile.
But all that changed in February when the Minneapolis company found itself the target of rival bids from the two giants in the applications software industry, SAP and Oracle.
On 28 February, Retek's board approved an offer of $496 million from SAP, an offer that seemed generous in the light of company's recent lacklustre performance. Executives said it would help strengthen SAP's retail products and boost its North American presence.
But over at Oracle, CEO Larry Ellison, advised by executive VP Chuck Phillips, a former Wall Street software industry analyst, decided an SAP-Retek combination posed too great a threat to Oracle. Despite barely having completed its hostile takeover of PeopleSoft, Oracle raided the markets and bought 10% of Retek's stock in two days before making a $525 million bid for the company.
Retek's board will be obliged to consider the higher offer – and both SAP and Oracle could now get involved in a bidding war that will push up the price.
What makes Retek so attractive – and why now? There are two reasons: first, the enterprise software market is becoming increasingly verticalised – and that means that big, general purpose enterprise resource planning (ERP) software suppliers must improve their line-ups with specialist products, functions and services.
Retail is a key sector. While the overall corporate software market has been flat for several years, the retail segment has grown, boosted by large retailers' adoption of supply chain management software. Retek is the world's leading provider of supply chain software and services to the retail sector. Its clients include Gap, Tesco, Selfridges, Sainsbury's and Sears.
This deep expertise and product set makes Retek a hot property. In November 2004, it extended these competencies with the acquisition of Syncra Systems, a leading provider of CPFR (collaborative planning, forecasting and replenishment) applications, which help retailers and suppliers manage their inventory better by predicting demand. This, says Noha Tohamy of Forrester Research, an advisory company, will enhance Retek's ability to provide a supplier relationship management platform.
According to Forrester, competitive pressure from SAP forced Retek to expand into collaboration. But perhaps SAP should have foreseen the counter-bid: around 80% of Retek's customers run their systems using Oracle's database and other application technology.
A second reason why Retek is so important: both ERP suppliers want to become established as the clear number one in enterprise software – especially in the US. Oracle is particularly determined to defend its leadership in the US – and between 60% and 70% of Retek's licence revenue come from North America.
While Retek's reputation within the retail market is excellent, Forrester described its financial performance as "less than optimal", and hence it welcomed SAP's initial offer. Revenues has fallen from $44.1 million in the fourth quarter 2003 to $39.8 million in the closing quarter of 2004. Annual revenues rose from $168.3 million to $174.2 million.
Whichever way Retek goes, analysts expect more acquisitions from the leading suppliers. In Larry Ellison's words, the retail sector "is underpenetrated and not dominated by any one company". The battle for Retek may already have put its smaller rival JDA Software into play.