SAP's TomorrowNow Troubles

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Costly on Many Levels

But it could be SAP that suffers the worst effects. Kagermann said in a July 2 conference call with reporters that the lawsuit could make it tougher to attract new customers for the support deals. Bruce Richardson, chief research officer at tech industry consultancy AMR Research, says TomorrowNow's second-quarter sales likely suffered, too. "The business is off," he says, adding that SAP has probably spent millions of dollars on its investigation.

If SAP settles with Oracle out of court—an option the companies could explore during a meeting scheduled for Sept. 4—it could cost SAP even more. "They probably want to get this thing behind them as fast as possible," Richardson says. Analysts expect SAP to earn 43¢ a share during the quarter, down from 45¢ a year ago.

SAP's stock also could suffer as a result of the admissions. Shares of SAP fell July 3 in Frankfurt and closed down 80¢, at $50.98, on the New York Stock Exchange. "Until SAP can satisfy the authorities that TomorrowNow's failings were isolated, this will remain a cloud over the stock," UBS (UBS) analyst Heather Bellini wrote in a July 3 research note.

"Unprecedented Event"

For SAP, getting sued by Oracle for not playing fair has an element of role reversal. The company has established a reputation for clean dealing since its founding in the early '70s, while Oracle has a history of shooting arrows meant to disrupt another company's business (see BusinessWeek, 3/29/07, "Oracle vs. SAP: Sound or Fury?"). "This is kind of an unprecedented event in SAP's history," says Stuart Williams, a senior analyst with industry consultancy Technology Business Research. "By keeping TomorrowNow at arm's length, SAP may actually have exposed themselves to this risk."

Oracle said in a statement that it "filed suit to discover the magnitude of the illegal downloads and fully understand how SAP used Oracle's intellectual property in its business." Oracle is seeking punitive damages, an injunction against SAP accessing its site, and return of any of its property stored on SAP computers. Oracle added that it plans to cooperate with the Justice Dept. inquiry.

SAP bought TomorrowNow in 2005, shortly after Oracle closed its $11.1 billion acquisition of business-applications vendor PeopleSoft. The unit booked about $21 million in 2006 sales. According to Kagermann, SAP will continue to market the business and its switch-from-Oracle program called Safe Passage. It's also putting in place policies at TomorrowNow aimed at thwarting further transgressions—and containing further fallout.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.