SAP Stock Drops on Deal News

A drop in SAP's stock price reflects analysts' and investors' dismay over the German software company's pricey entry into the business intelligence market

Shares in German software maker SAP (SAP) dropped by as much as 5.45% on Oct. 8 as investors turned thumbs down on the company's plans to pay $6.8 billion to acquire (BusinessWeek, 10/8/07) the French business intelligence software company Business Objects (BOBJ).

The deal would vault the world's third-largest software maker squarely into one of the software industry's hottest sectors. Business intelligence is now ranked by executives as the top priority in information technology spending. Together with an aggressive push by SAP into selling software aimed at small and midsize companies (BusinessWeek, 9/14/07), adding business intelligence to its portfolio could help the company win new customers at a time when sales growth has slowed for its traditional manufacturing and supply-chain management software.

SAP Defends Purchase

But SAP's stock took a drubbing because financial analysts criticize the company for paying too much for Business Objects. They also question the timing of the deal and say the acquisition represents a disturbing change in strategic direction for SAP, which has previously emphasized its preference for homegrown revenue growth vs. the kinds of splashy takeovers carried out by archrival Oracle (ORCL).

"There is little to commend SAP's acquisition," sniped Adam Shepherd, an analyst with brokerage Dresdner Kleinwort, in a research report. Shepherd sees the Business Objects deal reducing SAP's margins, gobbling up cash, and diluting its growth and earnings per share. Worst, perhaps, is "a perceived reversal of the company's focus on organic growth," Shepherd says.

SAP rejects the critique. "This is a very rational, well-thought-out acquisition that will bring about a huge amount of success for the market, the customers, the shareholders, and ultimately everyone," the company's deputy chief executive, Léo Apotheker, told BusinessWeek. "The price we are paying is rational if you look at Business Objects' past performance and its growth perspective and compare it to other acquisitions made in the market."

Third-Quarter Warning

SAP is offering €42, or $59.37, in cash per share of Business Objects, an 18% premium over the $50.27 closing price of the shares on Oct. 5, the last day of trading before the acquisition was announced. The deal is expected to close in the first quarter of 2008 and add to SAP's earnings by 2009. (Chief Executive Henning Kagermann said SAP's 2008 earnings will dip by about 7¢ per share due to the one-time costs of buying Business Objects.)

Business Objects will continue to be run as a stand-alone unit under the direction of John Schwarz, its current chief executive. Bernard Liautaud, Business Objects' co-founder and chairman, will serve as an adviser to Kagermann and is expected to be elected to SAP's board of directors.

The premium SAP is paying for Business Objects, however, does not take into account that the French company reported over the weekend that it will miss its financial targets for the third quarter, a troubling factor, notes Ross MacMillan, a financial analyst at Jeffries (JEF) in New York. "One has to ask: Why now?" MacMillan says.

Playing Oracle's Game?

The acquisition also will dilute SAP's 2008 earnings by about 2.5% because projected earnings won't make up for the loss of interest income SAP would have earned from the cash it's using to buy Business Objects, says Stefan Slowinski, a financial analyst with Société Générale (SOGN.PA) in London. But the real concern is that despite vocal criticism of Oracle's acquisition strategy, "it looks like SAP has joined the software sector consolidation game," he says.

When Oracle purchased Business Objects rival Hyperion Solutions on Mar. 1, it paid $3.3 billion, or about 2.9 times sales, says Slowinski. Seven months later, SAP is paying twice as much and 4.4 times sales for Business Objects, "so now it not only looks like they are changing their strategy; they are getting into consolidation a bit late and they are now competing with Oracle for acquisitions in a consolidating market," Slowinski says. "Oracle has better cash flows and a healthier balance sheet, so that is clearly not a competition you want to get into."

Apotheker insists that the acquisition is in line with SAP's strategy. "This is a marriage of growth, not cost reduction," he told attendees at a press briefing on Oct. 8 in a gilded room at Paris' tony Hotel Meurice, shortly after shaking hands with Liautaud for photographers."Together we can create a lot of value."

The fact that Business Objects missed a quarter is not an issue, Apotheker told BusinessWeek. "This is a strategic acquisition for SAP," he says. "You do not base such a decision on one quarter."

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