The software giant makes a move that some considered inevitable and others considered a reversal of a longtime commitment not to compete with its software partners.
Microsoft announced plans to purchase Great Plains Software for $1.1 billion. Great Plains is a developer of small to midsized business applications, including payroll, human resource, accounting, customer resource management and e-commerce software.
Microsoft group vice president Jeff Raikes and senior vice president of business applications David Vaskevitch will lead the Productivity and Business Services Group, which will include a Great Plains division. Great Plains CEO Doug Burgum will be the head of the new Microsoft division.
Microsoft is expected to offer Great Plains products through its bCentral small-business portal, among other channels.
The move comes as the server application software business seems to be growing--at least based on the performance of Microsoft rival Oracle.
Last Thursday, Microsoft was forced to cut by 5 percent its fiscal second-quarter and fiscal year 2001 earnings projections.
The same day, Oracle beat its second-quarter estimates, largely as a result of strong performance in application software sales. Oracle offers an integrated suite of e-business software, called Oracle 11i, which includes accounting, human resources, manufacturing and customer relationship management modules.
While Microsoft sells server software, its current products are largely limited to the infrastructure building blocks, which it now calls its .Net Enterprise Servers, upon which third-party applications are designed to run.
Microsoft executives have insisted over the years that the company had no intention of entering the market for server-based business applications, leaving that market to its independent software partners.
Just as desktop customers are interested in interested a single integrated office suite, business customers "are looking to pull together financial systems with e-selling, supply chain management and the like," said Microsoft's Raikes.
Oracle CEO Larry Ellison has made similar arguments recently, when describing Oracle's rationale for embedding more and more features and functionality into its database and application server lines. Oracle also sells an integrated suite of server-based business applications called Oracle 11i.
Microsoft officials bristled at any suggestion that Microsoft's Great Plains acquisition is meant to help Microsoft compete with Oracle on the business applications front, however.
"Oracle's very focused on the large-customer market," said Katheleen Hebert, vice president of Microsoft's small business division. "They (Oracle) might have ambitions otherwise, but there's not much there to report yet."
Hebert also denied that Microsoft ever claimed to have no plans to compete with its software partners in the server-based business applications market. Hebert cited the bCentral small business portal's customer management, finance management and other services as examples of current offerings by Microsoft in the business applications arena.
When asked by analysts if Microsoft's move to purchase a partner like Great Plains could mark the start of other future enterprise software acquisitions by the company, Raikes said, "Nobody should extrapolate about (Microsoft's intentions) in the enterprise software space."
Microsoft executives said Great Plains has been a "strong partner" with Microsoft for two decades. Raikes, speaking Thursday from Great Plains headquarters in Fargo, N.D., said he had been negotiating with Great Plains regarding increased partnering and/or acquisition possibilities since July. The Great Plains board voted unanimously to accept Microsoft's acquisition proposal Wednesday night, Raikes said.
Raikes said that the mutual customers of Microsoft and Great Plains will have a choice of buying packaged versions of Great Plains applications to run at their sites or buying the software via subscription as a service. Microsoft's software-as-a-service strategy is called .Net.
Merrill Lynch, in a research summary issued Thursday morning, said it considered Microsoft's buy of Great Plains an attempt to "accelerate its revenue mix shift towards higher-growth enterprise software and away from stagnating desktop revenue."
"This does change, quite dramatically, Microsoft's 'hands-off' approach to its application development partners," the Merrill Lynch note said. "Microsoft has historically provided development platforms and operating systems for an entire ecosystem of application developers who operated under Microsoft's wing as partners.
"This may change the complexion of some of these relationships, as it could introduce channel conflict as Microsoft now becomes an application provider and potential competitor to its development partners. This is the same issue that Oracle often encounters when selling its own applications suite."
Merrill Lynch added that the Great Plains deal could open the possibility for future acquisitions by Microsoft in the business software market.
Analysts at A.G. Edwards painted a similar picture.
"This takes Microsoft to a more competitive level to those companies that are looking to offer integrated, full-suite solutions," such as Oracle, analyst John Puricelli said in a research note. "The logical question now is what else is needed. We will continue to look for solutions that expand on the Windows NT platform in such areas as customer relationship management and supply chain management."
At the company's financial analyst meeting earlier this summer, Microsoft CEO Steve Ballmer foreshadowed the possibility that Microsoft might jump headlong into the server applications business.
At that time, Ballmer told analysts: "You'll see us build out not only Office productivity services...customer management, accounting, invoicing, manufacturing services; and in some sense I think of the work we're doing on bCentral as a flagship for showcase applications for everything that we want to do with the .Net platform."
The Great Plains acquisition follows by about two weeks a statement by one of Microsoft's European division heads that the company is considering acquiring or partnering with Sage Software, another small to midsize accounting, payroll and business software maker.
In response to the Sage report, a Microsoft representative said: "Microsoft is always talking with any number of companies across the industry about ways in which the companies can work together to offer better software and services to small-business customers. 'Working together' could mean any number of things, and we certainly have nothing specific to announce at this time."