updated 6/24/2004 8:54:11 AM ET 2004-06-24T12:54:11

Oracle Corp.’s hostile takeover bid for rival PeopleSoft Inc. convinced Microsoft Corp. that the software market’s competitive landscape had changed permanently, prompting Bill Gates to ponder how his company could protect its turf, according to evidence and testimony in a key antitrust trial.

The options considered by the Microsoft co-founder within 24 hours of Oracle’s bid included a defensive investment in PeopleSoft or a takeover of SAP, the largest maker of business applications software, according to an e-mail presented at the trial late Wednesday. (MSNBC is a Microsoft-NBC joint venture.)

“Thinking about this PeopleSoft bid ... made me wonder if we should approach them and suggest a minority investment to bolster their independence,” Gates wrote in a June 7, 2003 e-mail to Microsoft CEO Steve Ballmer.

In the same e-mail, Gates told Ballmer that “its (sic) time we bought SAP. Given our view of the need to strengthen our platform ... it seems interesting. Negatives would be complexity. I don’t think there would be regulatory issues, but that could be naive.”

Just 10 days after Gates floated the idea, Microsoft’s internal acquisition team wrote a report, dubbed “Project Constellation,” to mull the pros and cons of the SAP takeover, according to documents produced during Wednesday’s testimony.

The report assigned code names to prominent industry players, referring to Oracle as “Ophiuchus,” PeopleSoft as “Pegasus,” SAP as “Sagittarius,” and Microsoft as “Mensa.”

The previously confidential report provided the first detailed glimpse at why Microsoft considered buying Germany-based SAP since the software giant acknowledged the takeover talks more than two weeks ago, just before the start of the antitrust trial examining Oracle’s PeopleSoft bid.

Microsoft abandoned the SAP discussions during the spring and has no plans to renew the talks, a top company executive, Douglas Burgum, testified late Wednesday during nearly four hours on the witness stand.

The Project Constellation report expressed Microsoft’s grave concerns about the Oracle bid, now valued at $7.7 billion. In an e-mail sent to Gates and Ballmer along with the report, Microsoft executive Cindy Bates accurately predicted PeopleSoft’s staunch resistance to Oracle might stymie the deal.

“But regardless of the outcome, the dynamics of the industry have changed,” Bates wrote. “We should think proactively in determining our fate, as no doubt the folks in Armonk (N.Y.) are doing.” Armonk refers to the headquarters of IBM Corp., which drew up a report predicting millions of dollars in lost software sales if Oracle devours PeopleSoft.

The report also raised concerns about how Oracle CEO Larry Ellison, a caustic Gates critic, would exploit the PeopleSoft offer to raise his profile. “The bid has given Ellison a platform to market his view of the future,” the report warned.

Microsoft’s competitive intentions are a pivotal point in a trial focused on a relatively small but important niche in the business applications software — the computer coding that automates a wide range of administrative tasks.

The Justice Department contends SAP, Oracle and PeopleSoft are the only software makers with the resources to sell the sophisticated applications that handle an array of financial and personnel management jobs at large U.S. companies.

Oracle believes the market is fiercely competitive, pointing to existing rivals, such as Lawson Software Inc., and a widely held expectation that Microsoft will become more aggressive in the business applications market.

Burgum testified the perceptions about Microsoft are wrong, depicting the company’s business applications division as an unprofitable operation with products ill-suited for large companies.

Expanding into the large-company market “would take years and years,” said Burgum, who runs Microsoft’s “business solutions” division. “It would take more money than ... Microsoft would be willing to commit.”

Microsoft, which has $56 billion in cash, was prepared to open its wallet to buy SAP. The German company had a market value of $38 billion at the time Gates wrote his e-mail and the Microsoft indicated the company would pay a premium to pull off the deal. The price Gates envisioned was removed from his e-mail for competitive reasons.

Oracle believes Microsoft’s flirtation with SAP proves the software giant is determined to become a bigger player in business applications software. Microsoft already has spent more than $2.5 billion on acquisitions during the past three years to become a more formidable player.

The Justice Department is trying to use Microsoft’s talks with SAP as an example illustrating how difficult it is for any company to break into the market selling complex software to large organization. It’s a premise that Burgum supported in his testimony.

The SAP talks “indicated Microsoft viewed the market as a market that’s exceptionally difficult to enter,” Burgum said. “If we were to consider one (expansion) scenario, we would consider the ’buy’ scenario instead of the ’build’ scenario.”

Microsoft is trying to upgrade its business applications software, but none of the products being developed under the company’s so-called “Project Green” will hit the market until 2008, Burgum said.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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