SAP alliance could drag down profits

SAP's profits for the first six months of 2001 may have to be revised downwards by more than a third once authorities approve its increased investment in loss-making rival Commerce One.

The ebusiness software firm is set to invest up to £158.5m ($225m) in Commerce One, raising its stake from 4.4 to over 20 per cent. Once it owns more than one fifth, US accounting rules mean that SAP will have to declare Commerce One's losses within its own financial results.

Last week, SAP beat analyst expectations when it announced profits for April to June of £126.7m (Eu206m), but this could soon be revised down to £61m (Eu99m) if Commerce One's figures are included. Commerce One lost £1.4bn ($2bn) for the period, including one-off charges and acquisition costs, and returned operating losses of £49.3m ($70m).

Experts said the US rules meant that SAP would thus report net profits of £128m (Eu208m) for the first half of 2001, instead of £198m (Eu322m).

Analysts said the size of Commerce One's losses probably surprised SAP, and raised questions about the nature of the alliance. Previously, some analysts have predicted that SAP would eventually take over Commerce One.

Speaking as SAP revealed that it would increase investment in Commerce One at the end of June, Pawan Malhotra, an analyst at SG Cowen Securities, said that SAP had already made a significant investment in Commerce One, using the latter's software infrastructure as a critical component of its SAP markets platform.

He added that SAP would want to continue to support Commerce One to make sure it remains not just viable, but a strong competitor.

Richard Williams, an analyst at Jeffries & Co, added that Commerce One gives SAP "very necessary functionality and product".