How About SAP + Salesforce.com?

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 – Salesforce.com, 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.