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SAP Sheds M&A Shyness as Oracle Rivalry Moves to the Cloud

SAP AG’s then-chief Leo Apotheker told investors in 2009 that the German company’s homegrown technology was “significantly better” than that of Oracle Corp. (ORCL), which had “not done a good job with acquisitions.”

Apotheker was forced to leave three months later and his successors, co-CEOs Bill McDermott and Jim Hagemann Snabe, have already spent more than $9 billion on two major takeovers. The most recent came on Dec. 3, when SAP agreed to buy San Mateo, California-based SuccessFactors Inc. for $3.4 billion in cash to catch up with Oracle in the cloud-computing market.

McDermott and Snabe have changed tack at the largest maker of business-management software to do a better job meeting demand for new technologies, such as cloud computing, real-time analytics and mobile applications. The SuccessFactors deal shows SAP’s previous go-it-alone approach to the cloud was lacking, said Thomas Otter, a vice president at Gartner Inc.

“My first reaction was: What took you so long?” Otter said in a phone interview from Heidelberg, Germany, less than 50 miles away from SAP’s headquarters in Walldorf. “This means a fundamental shift in terms of their cloud strategy, which has been rather slow to get off the ground. This is a tacit admission that their cloud strategy was a failure.”

Short Investors

SuccessFactors rose 51 percent to $39.75 at the close in U.S. trading today. SAP shares, meanwhile, dropped 2.5 percent to 43.61 euros in Frankfurt, valuing the company at 53.5 billion euros. The stock has gained 14 percent this year.

The jump in SuccessFactors’ shares has made life difficult for people shorting the stock, or betting that it will go down, CEO Lars Dalgaard said today.

“The first thing I’m enjoying is how many shorts we fried,” Dalgaard said in an interview on “Bloomberg West.”

Investors increased short sales on SuccessFactors to 17.7 percent of shares outstanding as of Dec. 1, according to data compiled for Bloomberg by New York-based researcher Data Explorers. That was near the high of 18.3 percent on Nov. 24 -- a record going back at least to November 2007.

Still, the deal raises concerns for SAP, said Michael Briest, an analyst at UBS AG.

“In addition to the high price paid, which we think investors will see negatively, the other question will be whether the decision to acquire reflects a sign of SAP’s strength or its weakness,” he said. Briest cut his rating on SAP shares to “neutral” from “buy.”

Cloud Movement

SAP, Oracle and companies such as Apple Inc., Salesforce.com Inc. (CRM), International Business Machines Corp. (IBM), Amazon.com Inc. (AMZN), Dell Inc. (DELL) and Microsoft Corp. (MSFT) are promoting cloud computing as a secure way to outsource data centers and reduce the need for pricey servers and other hardware.

SuccessFactors, which makes software used to manage employee performance, has more than 3,500 customers and 15 million subscribers in 168 countries. The company is predicted to have $502 million in revenue in 2013, up from $332 million this year, according to analyst estimates (SFSF) compiled by Bloomberg.

The purchase could add another 1 billion euros ($1.34 billion) to SAP’s 2015 sales target of 20 billion euros, co-CEO McDermott said in a telephone interview.

SAP is paying eight times SuccessFactors’ forecast revenue for next year, compared with a median of three times revenue companies paid for 32 North American software targets over the past five years, Bloomberg data show. It is paying a premium of 54 percent, based on a 20-day average of the target’s share price, compared with a 22 percent premium Oracle paid for cloud competitor RightNow Technologies Inc. on Oct. 24.

‘Crown Jewel’

“You get what you pay for and if you want the crown jewel in this industry, you have got to pay for it,” McDermott said. “We are very comfortable with the relationship between the price and 2012 revenues. It’s very much in the medium range. We don’t consolidate old tired companies that don’t grow anymore.”

SAP may take a break from large deals following the close of SuccessFactors, while it concentrates on expanding in cloud computing, mobile business software, data analysis and in-memory computing, McDermott added.

“For now, I think we have the assets we need to win,” he said.

McDermott and Dalgaard first met on Sept. 27 at SuccessFactors’ suburban office in San Mateo, the executives said. McDermott said he “personally” evaluated a number of cloud computing competitors -- including having dinners with their executives -- before deciding to buy SuccessFactors. Competing with Oracle wasn’t a driving factor in the deal, he said. One asset SAP gains is Dalgaard himself.

Software as a Service

Dalgaard, 44, will have the job of overseeing SAP’s broad software-as-a-service efforts, including its Business ByDesign Web programs for midsized companies. Peter Lorenz, an SAP executive vice president in charge of the group of products, will report to him, McDermott said.

“Lars will oversee the entire SAP cloud,” McDermott said. “This is our catalyst.”

Owning SuccessFactors, which helps companies decide which employees to retain and how much to pay them, can help SAP sell “human capital management” software to the highest echelons of its customers’ management, McDermott said. SuccessFactors may also add programs for handling logistics and supply-chain operations, Dalgaard said.

Termination Charge

There will be a termination fee of $112.5 million in certain circumstances if the deal falls through, SuccessFactors said today.

“The talent management market will probably be worth about $3.5 billion this year,” Otter said. “SAP has essentially spent what the whole market will be worth this year in one swoop. It is a lot to pay for a niche in their portfolio, but human resources technology is a hot space.”

The global market for cloud services may surge to $148.8 billion in 2014 from $68.3 billion in 2010, Gartner estimates.

Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon, said SAP may need to make more cloud acquisitions.

“They’ve now got a very good basis here, but I would expect them to make smaller acquisitions in cloud to complement this,” he said in an interview. “Maybe they’d look at someone in expense management, like Concur Technologies Inc. (CNQR), or in procurement, like Ariba Inc. (ARBA)

Ariba gained 14 percent in U.S. trading today, while Concur climbed 11 percent.

Oracle’s Acquisitions

While Oracle has spent more than $42 billion on takeovers since the beginning of 2005, SAP had only made only two large acquisitions in its 39-year history before SuccessFactors: Sybase, a maker of mobile-device applications, for $5.8 billion in May of last year, and business-intelligence company Business Objects for 4.8 billion euros in 2007.

“They need to make acquisitions,” Ray Wang, head of San Francisco-based Constellation Research, a research and advisory firm focused on technology, said in an interview. “Innovation now happens at startups and SuccessFactors is a lot like a startup.”

SAP has added three categories since May 2010: mobile- computing software; Hana real-time analytics technology; and software that can be accessed over the Internet. Hana and mobile made up 10 percent of third-quarter sales, Snabe said on Nov. 17, adding that SAP aims to add product categories to accelerate sales growth.

‘M&A Factory’

Siemens AG (SIE), Exxon Mobil Corp. (XOM) and Wal-Mart Stores Inc. (WMT) are among more than 176,000 companies that use SAP’s applications to order goods, plan inventory levels and manage sales. The company is trying to sell them mobile software gained through the Sybase acquisition and the Hana software, which lets companies analyze data in a computer’s memory instead of through slower disk drives.

SAP, the largest maker of business-management software, has more than 20 people dedicated to integrating acquired companies in the information-technology department, Chief Information Officer Oliver Bussmann said.

“We have an M&A factory at SAP,” he said in an interview in San Francisco on Nov. 30.

Gartner’s Otter says SAP’s more aggressive M&A strategy may spark a reaction from its U.S. archrival.

“Oracle took the first move with the acquisition of RightNow and SAP needed to respond,” he said. “Given Oracle’s propensity to acquire, this is going to heat things up.”

To contact the reporters on this story: Ragnhild Kjetland in Frankfurt at rkjetland@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Simon Thiel at sthiel1@bloomberg.net

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