SAP AG (SAP), the world’s top maker of business applications, will rely on software innovation rather than large acquisitions to vie with Oracle Corp. (ORCL) in the $2 trillion global corporate-technology market.
“We’ve made the decision to innovate the future, not consolidate the past,” said co-Chief Executive Officer Bill McDermott, in an interview today. “I don’t see where hardware is going to give us an advantage.”
While Oracle, International Business Machines Corp. (IBM) and Hewlett-Packard Co. (HPQ) have used acquisitions to become one-stop shops for corporate hardware and software, SAP has focused on getting products out the door more quickly and used deals to expand in data-analysis and applications for smartphones and other portable devices.
Since McDermott and co-CEO Jim Hagemann Snabe took the helm of Walldorf, Germany-based SAP in February 2010, the shares have climbed 9.3 percent even as the European debt crisis curtailed spending in that region. Oracle surged 23 percent over that period, with a 33 percent sales gain in the last fiscal year, showing investor confidence in efforts by CEO Larry Ellison to expand revenue through acquisitions.
SAP’s sales rose 17 percent last year as McDermott and Snabe steered into areas including software for mobile devices such as Apple Inc. (AAPL)’s iPad. New data analysis software called Hana lets customers quickly analyze large amounts of sales and operational information.
Executives Buy Shares
“We agree that the stock is low, that’s why we bought it,” McDermott said, referring to executive share purchases. “We’re not worried about the short term reaction of the market.”
SAP will meet its 2015 sales forecast of 20 billion euros ($27.3 billion) even amid turmoil in Europe, McDermott and Snabe said. That tops the average 18.5 billion euro estimate of analysts surveyed by Bloomberg.
“What does it mean for our business? Not so much so far,” Snabe said of the economic situation in Europe. “The countries that are in trouble are very small in our global portfolio.”
Global spending on information technology by companies and governments will reach $2.15 trillion next year, up 18 percent from 2010, according to a Sept. 16 report from Forrester Research Inc. (FORR)
SAP controls 25.3 percent of the $21.2 billion market for business-management software, more than twice Oracle’s share, according to market researcher Gartner Inc. Siemens AG (SIE), Exxon Mobil Corp. (XOM) and Wal-Mart Stores Inc. (WMT) are among about 180,000 companies that use its applications to order goods, plan inventory levels and manage sales.
Now, SAP is trying to sell them on mobile software gained through last year’s $5.8 billion acquisition of Sybase Inc. and the Hana software, which lets companies analyze data in a computer’s memory instead of through slower disk drives.
If Hana “really gets traction in the market,” it can help SAP boost software license sales by as much as 20 percent between 2013 and 2015, said Knut Woller, a technology analyst at UniCredit Research in Munich.
Even with the new offerings, SAP must convince customers not to switch to products from rivals, including Oracle and IBM, which sell combinations of hardware and software. Oracle plans to announce database software that runs in computer memory -- similar to SAP’s Hana -- at its OpenWorld conference in San Francisco next month, said Jason Maynard, an analyst at Wells Fargo Securities in San Francisco.
“It makes all the sense in the world that Oracle would extend its products,” said Maynard, who has a “market perform” rating on SAP. “The best advice I could offer to SAP is, continue to focus” on software, he said.
SAP’s pitch: Software tailored for specific industries that’s compatible with any device companies may use makes a single vendor for hardware and applications unnecessary.
“When you think about what Oracle did, they had a best-in- breed database business and they looked out there and they said, ‘What customers want is a one-stop shop,’” said Rob Taylor, co- manager of Harris Associates’ Oakmark International Fund and Oakmark Global Fund, who owns SAP and Oracle shares.
“Oracle used acquisitions to get to where SAP is now,” said Taylor. “Having more stuff to offer a customer that is very sticky is beneficial.”
Oracle agreed to buy Sun Microsystems Inc. for about $7.4 billion in 2009, stepping in after IBM’s talks to buy the server maker collapsed. The deal, among several aimed at SAP’s core business customers, gave Oracle Sun’s Java technology and the Solaris operating system software.
Hewlett-Packard on Aug. 18 announced a $10.3 billion acquisition of enterprise software company Autonomy Corp. IBM agreed in 2009 to buy SPSS Inc. for about $1.2 billion to gain software that helps businesses analyze and predict trends, two years after it paid $4.9 billion for Cognos Inc. to add software for tracking corporate performance.
SAP partners including IBM, Hewlett-Packard, Dell Inc. (DELL) and Cisco Systems Inc. (CSCO) run Hana software on their computers, which may make selling hardware unnecessary, said Josh Greenbaum, an analyst at Enterprise Applications Consulting in Berkeley, California.
“That’s a DNA transplant that’s pretty severe for the likes of SAP,” he said. “They just don’t have to build the hardware. They just get to sell the high-value components.”
Staying independent lets SAP more easily strike partnerships with hardware companies whose systems can run SAP applications, McDermott said.
“IBM wouldn’t like us nearly as much if we decided to buy a hardware company,” he said.
McDermott and Snabe became co-CEOs after the February 2010 ouster of former CEO Leo Apotheker, who is now chief executive at Hewlett-Packard.
McDermott, 50, who comes from Long Island, New York, joined SAP in 2002 and was head of global field sales. Snabe, 45, who is Danish and lives in Copenhagen, joined the company in 1990 as a trainee and rose through the ranks of consulting, software development management and sales.
McDermott and Snabe said they plan to keep co-CEO structure indefinitely.
“I have no reason to believe we wouldn’t do it till retirement time,” McDermott said.
The company is focused on shortening the time it takes to release new products and intends to continue spending about 14 percent of revenue on research and development, Snabe said.
We will be hiring some young, smart people in all the geographies across the world,’’ Snabe said. “We are definitely moving from quantity to quality.”
-- With assistance from Ragnhild Kjetland in Frankfurt. Editors: Lisa Rapaport, Tom Giles
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