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How About SAP +

Posted on Thursday, Apr 30th 2009

While Oracle and IBM have been in the news with their strong quarters and acquisition bids and plans, their competitor, SAP (NYSE:SAP), the world’s leading provider of business software with 2008 revenue of €11.57 billion or $16.3 billion, has been lying low. On the eve of its first quarter earnings report, which missed estimates, let’s see how these acquisition moves affect SAP. 

Oracle’s acquisition of Sun should not have any immediate effect on SAP, but there is talk in the market about its takeover by Oracle’s rivals IBM, HP, Microsoft and even Cisco as the Sun acquisition threatens these companies. They are under pressure to counter Oracle’s move, and SAP would be a big prize. But it would be equally hard to digest as it would be at least a $50 billion transaction. So SAP is not likely to be acquired, but there are bound to be some interesting takeovers this year.

While Oracle spends billions on its acquisitions, SAP is looking to cut costs. In Q4, it announced its plans to bring down its headcount by 3,000 to 48,500 this year. It has already cut 2,200 jobs in the first quarter with a 6% cut in its sales team and a 1% cut in the research team. SAP has typically been in favor of organic growth rather than acquisition and it seems to be focusing on developing new products. Regarding its acquisition strategy, SAP said that it has just finished integrating Business Objects, which specializes in business intelligence, but is open to acquisitions if the opportunity arises. SAP ended the quarter with total group liquidity of €2.95 billion, or approximately $4 billion.

The charges from the job cuts hurt its profit by a €160 million restructuring charge. Net profit in the first quart declined 16% to €204 million from €242 million last year, widely missing analyst estimates of €261 million. Q1 revenue declined 3% to €2.40 billion, missing analyst estimates of €2.55 billion. Software revenue, which generates future revenue from maintenance and consulting services, plunged 33% to €418 million. Software and software-related service revenues were €1.74 billion, flat y-o-y.

On the bright side, SAP reiterated its outlook for the year 2009. It expects its full-year 2009 non-GAAP operating margin to be in the range of 24.5% to 25.5%, including one-time restructuring charges between €200 million and €300 million. It expects non-GAAP software and software-related service revenues to be flat to a decline of 1% compared to €8.623 billion in 2008.

The stock is currently trading around $38 with a market cap of about $45 billion. It hit a 52-week high of $41.60 following the Sun acquisition and speculation about SAP’s takeover by Oracle’s rivals.

I don’t see ANY possibility of such an acquisition in the near term. Their culture is unique and will be extremely difficult to enmesh with Microsoft, HP, IBM or Cisco – the players that are making a bid for world dominance. Simply put, SAP is just too big. But if alliances are to take place – and I think they do –, with a market cap of $5 billion and annual revenue of $1.1 billion, is an interesting possibility for SAP to consider. SaaS is clearly a trend too big to ignore. Benioff hates Larry Ellison, and may embrace SAP in an enemy of my enemy is my friend mode.

I would prefer to see SAP in the role of acquirer, rather than that of a target.

Chart for SAP AG (SAP)

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why do we always want tech companies to merge? Is M&A the only way to create shareholder value? From a customer standpoint, they are usually a travesty – in the countless acquisitions Oracle and IBM have done in the last 10 years, there is little tangible evidence that customers have benefitted – particularly when the target was already of decent size and not in distress..

Every time I have seen Marc speak, he tweaks Oracle, the company (and IBM and SAP and Microsoft) but he goes the extra step and calls Larry his mentor. So not sure where you get the “hates Larry” – there is respect he need not show in public.

In the end he has to think of his investors, but Marc can create far more long-term shareholder value by continuing to lead the industry move to cloud computing rather than becoming mired in the SAP bureaucracy (or IBM, or Oracle or MS’s)

vinnie mirchandani Thursday, April 30, 2009 at 10:42 AM PT

Hi Vinnie,

I think the consolidation is going to continue just because of the way the market is set up right now.

Personally, I’d much prefer to see the tech power structure be a 20 major player game rather than 5. This too-big-to-fail business is very bad.

Marc – yes, he has done a good job leading the industry. But he needs to show profitability. One way to do that is by becoming an acquirer of smaller players, out of the 500+ SaaS apps out there already.

Acquisitions need to happen for the entrepreneurship market to keep going. We need exits, right?

Sramana Mitra Thursday, April 30, 2009 at 11:57 AM PT

Oracle’s acquisition of Sun was another brilliant move by Larry Ellison and company. While this wouldn’t have fit only a few years ago, the state of the game in hardware and software is just right.

This is a big contrast to any SAP + relationship. While SAP has missed a lot of the SaaS opportunity, their ideologies are at odds with each other and would only spell “disaster”. SAP’s horrendously difficult implementations feed armies of consultants (and new sales) is quite a contrast to the elegant on-demand model that while Salesforce embraces.

David LeVine Thursday, April 30, 2009 at 5:26 PM PT

I am sure consolidation will continue but I don’t see Salesforce management wanting to sell. They are riding the right wave and doing it pretty well IMHO. SAP would also have a pretty hard time paying the price that Salesforce is currently valued at by the market (plus a premium to entice shareholders to sell).

SAP and Oracle both face a horrible innovator’s dilemma. If they legitimize the SaaS market too much they accelerate the transition of their conservative customers. If they move too slow they can be like DEC, Wang or any other company that once rode high and missed the next wave.

I can see the big old CHOIS guys – Cisco, HP, IBM, SAP – buying up smaller vendors similar to them and trying to turn them slowly to SaaS model. I can see current SaaS champions buying smaller SaaS innovators. But I am not so sure about cross-species mergers. The valuation gap is on big inhibitor.

But then – full disclosure – I am an out and out SaaS bull. It is simply a much, much better model for the vendor, the client and the investors.

The two companies to watch (and invest in methinks) are Cisco and IBM. Superb management that has rode previous waves and won’t miss the SaaS wave. IBM buying Salesforce is a bit more credible, but only a bit. I think Benioff wants to take this all the way and he is delivering the numbers to investors so they will probably let him.

Bernard Lunn Friday, May 1, 2009 at 7:45 AM PT

“This too-big-to-fail business is very bad.” – That’s a good point, Sramana. I was thinking along the similar lines. In future ( next 15-20+ years) will the state of enterprise software resemble the current state of auto industry?

For instane, Oracle wil become so big and non-innovative that their business will be disrupted by other innovative companies, potentially from Asia (India, China). At that stage, Oracle will need to be bailed-out since if they go under it will not be good for the US economy.

Should there be regulations to make sure that companies don’t grow so large and dominant that their failure becomes unacceptable for the greater good?

Naren Chawla Tuesday, May 12, 2009 at 5:59 PM PT