SAP Tries To Find Its Groove In A Consolidating Industry

The economic slowdown opened up opportunities for technology giants such as Cisco, HP, and Oracle to make strategic acquisitions at bargain prices. Oracle has always been seen as a pro at acquisitions, while SAP has relied mostly on organic growth. But it looks as though SAP wants to break away from that image – it recently acquired Sybase for $5.8 billion and before that, Business Objects for $6.78 billion. Let’s take a closer look.

Analysts believe former CEO Leo Apotheker lost his job early this year partly because apart from revenue losses, SAP was slipping from its position as a market leader. Oracle, HP, and Cisco have been acquiring companies in adjacent markets to expand, while SAP hasn’t been making major acquisitions nor showing any other kind of significant vision. Its most recent major acquisition was Business Objects for $6.78 billion in 2007, which made it a leader in the analytics space. The company needs more such acquisitions to stay in the major leagues. SAP recently appointed Bill McDermott and Jim Snabe as co-CEOs, and the company has already made an acquisition of nearly $6 billion. It seems clear that the new management wants to make big deals to stay ahead.

According to Bloomberg, 1,057 deals have been announced over the past year in the software industry, and the Sybase deal is the fifth-largest software takeover in history. Sybase will help SAP to gain a comprehensive set of technologies for mobile applications as well as software that helps financial institutions analyze information. Paul Hamerman, vice president of enterprise applications at Forrester Research, says: “The deal makes sense because SAP is betting heavily on in-memory computing and mobile applications as the future of computing and Sybase brings to the table a capability for high-speed in-memory databases and a mobile application platform.”

Chris Kanaracus of Businessweek looks at the hurdles that SAP might have to jump over in integrating Sybase. SAP plans to operate Sybase as a separate division. And Quentin Hardy of Forbes asks, “The purchase also raises the question, What else does SAP need to buy, and who might they partner with, in order to compete in the land of giants?” In my most recent post on the company, I suggested an SAP-HP partnership in the domain of mobile enterprise applications that leverages HP’s recent acquisition of Palm. A few major acquisitions in the SaaS sector are also recommended. Gartner expects SaaS revenue to increase 14% to $8.5 billion this year.

SAP (NYSE:SAP) this week reported second quarter revenue of €2.89 billion ($3.53 billion), up 12%. Software and software-related service revenue grew 16% to €2.26 billion while software revenue grew 17% to €637 million. Net income was up 15% to €491 million ($642 million) or €0.41 per share from €426 million ($557 million) or €0.36 per share last year. The company ended the quarter with liquidity of €3.96 billion ($5.18 billion). Q1 analysis is available here.

SAP expects full-year 2010 software and software-related service revenue to increase by 6% to 8% at constant currencies. Including revenue from Sybase, the company expects revenue to grow 9% to 11%. The stock is trading around $47 with a market cap of about $55 billion. It hit a 52-week low of $40.95 on May 25 and a 52-week high of $52.73 on October 21.