The big fuss over little Retek

Just what sort of company is Retek to inspire such chest-beating from two of software's biggest gorillas?

The Minneapolis-based software company specializes in complex business systems for retailers, offering programs that help big chain stores, including Gap and Best Buy, to handle merchandise. Specifically, the programs assist retailers with decisions about how much merchandise to order and how to distribute it among their various outlets. They also help keep tabs on inventory once it's in stores.

Retek is a leader in this niche, but it faces a slew of new hot-shot competitors that sell related technology, such as sophisticated tools for managing discounts and specials. It also struggles with the fact that big retailers are conservative in adopting information technology and typically demand lots of special treatment from their software suppliers, which has been a drain on profits.

Oracle and SAP certainly aren't chasing Retek because it's a profit machine. Its profit margin last year was just 4.7 percent--a paltry sum for a software company and a big reason the company is on the auction block. Its revenue was just more than $174 million--a drop in the bucket for Oracle and SAP, which each bring in billions of dollars a year.

Other assets enticed SAP and Oracle, including Retek's enviable list of marquee retail customers. In addition to Gap and Best Buy, it includes Abercrombie & Fitch, Nordstrom, Radio Shack, Britain's Sainsbury's, Tesco in Germany and Sears, Roebuck.

That's a big draw, particularly for Oracle, which supplies some of these companies with database technology but not a lot of application software, analysts said.

"Oracle's merger and acquisition strategy...it's not as simple as saying, what is the thing that Oracle has to have?" said Tad Piper, securities analyst at Piper Jaffray. "It is equally driven by gaining customers that they don't already have access to."

Oracle pursued PeopleSoft, the rival it acquired in January, for that reason. Its products largely overlapped with Oracle's, but PeopleSoft supplies software to thousands of multinational companies that Oracle sought as clients.

Retek has another thing going for it. Analysts expect retailers to ratchet up their software consumption soon, after a long stretch of relatively flat spending. While other industries gorged themselves on information technology during the Internet stock boom and have since cut back, retailers have yet to come to the table. Software makers are eyeing retail, which spends about $10 billion annually on their wares, as an untapped opportunity in a sea of satiated buyers.

"Retailers have generally underspent on technology in the last few years; they didn't overspend like other sectors did," said Peter Coleman, a securities analyst at ThinkEquity Partners. "So they're on the beginnings of a fairly significant upgrade cycle."

And retail technology is certainly advancing. There are new bar code standards to be dealt with, ever-growing quantities of data that are ripe for mining, and new in-store technologies, such as self-checkout stations.

RFID on the way
Another major technology shift expected to hit retailers in the coming years is radio frequency identification, or RFID, which is at the core of a next-generation bar code system that Wal-Mart Stores, Target and other big guns are now testing. Retailers have said the technology will shrink inventory costs, curb theft and deliver a host of other benefits. The software industry is seeing dollar signs.

Microsoft is also making a big push to appeal to stores, another indication that the software industry sees promise in the sector. The company recently launched a Smarter Retail Initiative, aiming to supply retailers with RFID and point-of-sale systems. Several years ago, Microsoft acquired Sales Management Systems, a privately held retail software supplier in Anaheim, Calif., for an undisclosed sum.

But experts warn that retail information technology is not an easy market to crack, as Retek's experience shows. Retailers are hard to please--with their mountains of data, complex operations, low margins and some of the most challenging supply chain problems known. Even SAP, which has been developing its own Retek-like products, has had a tough go of it--one reason it's now eyeing the company.

Still, Oracle and SAP both have the time and resources to figure it out, and landing Retek will be a boon for whoever makes the winning bid, software watchers said. ThinkEquity's Coleman is tipping his hat to Oracle.

"For SAP, it's a shot in the arm to boost their position in the market and take out a competitor," Coleman said. "It was a 'nice to have' for SAP, not a 'must have.' It's a 'must have' for Oracle."

News.com's Mike Ricciuti contributed to this report.