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

SAP AG's at that time-chief Leo Apothekertold investors in 2009 that the German company's homegrowntechnology was "significantly better" than that of OracleCorp., which had "not done a good job with acquisitions."

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

McDermott and Snabe have changed tack at the largest makerof business-management software to do a better job meetingdemand for new technologies, just as cloud computing, real-timeanalytics and mobile applications. The SuccessFactors deal showsSAP'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?" Ottersaid in a phone interview from Heidelberg, Germany, less than 50miles away from SAP's headquarters in Walldorf. "This means afundamental shift in terms of their cloud strategy, which hasbeen to put it more exactly slow to get off the ground. This is a tacitadmission that their cloud strategy was a failure."

SAP, Oracle and companies just as Apple Inc.,Salesforce.com Inc., International Business Machines Corp.,Amazon.com Inc., Dell Inc. and Microsoft Corp. are promotingcloud computing as a secure way to outsource data centers andreduce the need for pricey servers and other hardware.

SuccessFactors, which makes software used to manageemployee performance, has more than 3,500 clients and 15million subscribers in 168 countries. The company is predictedto have $502 million in revenue in 2013, up from $332 millionthis year, according to analyst estimates compiled by Bloomberg.

The purchase could add another 1 billion euros to SAP's 2015 sales target of 20 billion euros, co-CEOMcDermott said in a telephone interview.

SAP is paying 8 times SuccessFactors's forecast revenue fornext year, compared with a median of 3 times revenue companiespaid for 32 North American software targets over the past fiveyears, Bloomberg data show. It is paying a premium of 54percent, based on a 20-day average of the target's share price,compared with a 22 percent premium Oracle paid for cloudcompetitor RightNow Technologies Inc. on Oct. 24.

What you pay for

"You get what you pay for and if you want the crown jewelin this industry, you have got to pay for it," McDermott said."We are very comfortable with the relationship between theprice and 2012 earnings. It's very much in the medium range. Wedon't consolidate old tired companies that don't grow anymore."

SAP may take a break from large deals following the closeof SuccessFactors, during it concentrates on expanding in cloudcomputing, mobile business software, data analysis and in-memorycomputing, McDermott added.

McDermott and SuccessFactors CEO Lars Dalgaard first met onSept. 27 at SuccessFactors's suburban office in San Mateo, theexecutives said. McDermott said he "personally" evaluated anumber of cloud computing competitors -- including havingdinners with their executives -- earlier deciding to buySuccessFactors. Competing with Oracle wasn't a driving factor inthe deal, he said. One asset SAP gains is Dalgaard himself.

Dalgaard, 44, will have the job of overseeing SAP's broadsoftware-as-a-service efforts, including its Business ByDesignWeb programs for midsized companies. Peter Lorenz, an SAPexecutive vice president in charge of the group of products,will report to him, McDermott said.

"The talent management market will probably be worth about$3.5 billion this year," Otter said. "SAP has essentiallyspent what the whole market will be worth this year in oneswoop. It is a lot to pay for a niche in their portfolio, buthuman resources innovation is a hot space."

The beginning of 2005

While Oracle has spent more than $42 billion on takeoverssince the beginning of 2005, SAP had only made only two largeacquisitions in its 39-year history earlier SuccessFactors:Sybase, a maker of mobile-device applications, for $5.8 billionin May of last year, and business-intelligence company BusinessObjects for 4.8 billion euros in 2007.

"They need to make acquisitions," Ray Wang, head of SanFrancisco-based Constellation Innovation, a innovation and advisoryfirm focused on research, said in an interview. "Innovationnow happens at start-ups and SuccessFactors is a lot like astart-up."

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