SAP Makes Pricey Bet on Cloud-Computing Race

Monday, 05 Dec 2011 12:26 PM

 

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SAP's $3.4 billion takeover of SuccessFactors will help it keep up with peers in the frenzied race for cloud-computing business, even if the price it paid is very high at first glance, analysts said on Monday.

"We believe SuccessFactors could be a very good strategic fit for SAP in the cloud sector and we prefer the decision to grow externally in this booming area," DZ Bank analyst Oliver Finger said.

SAP said on Saturday it was buying U.S. web-based services company SuccessFactors for an agreed $40 per share, a 52 percent premium.

The deal helps SAP catch up with rivals in cloud computing, a fast-growing field where data and processes are hosted remotely on the Web. As part of the transaction, SuccessFactors founder and chief executive Lars Dalgaard will join SAP's executive board and will run its cloud business.

"This marks implicit recognition by SAP that their cloud strategy is not working," Evolution Securities analyst Roger Phillips said.

SAP shares were down 1.7 percent at 43.94 euros by 1455 GMT, while Germany's blue-chip DAX index was up 1.2 percent. SuccessFactors shares climbed 51 percent to $39.70, nearly hitting SAP's $40 offer price.

Analysts had warned that SAP risked losing ground to Oracle in the field of cloud-computing. However, there are not many assets in the business available for it to buy.

Salesforce.com is seen as too big to acquire, rival Oracle bought RightNow Technologies in October, and NetSuite is majority owned by Oracle CEO Larry Ellison.

"In fact, it is not clear who is next in line behind SuccessFactors. For this reason, despite the apparently rich price tag, we would not rule out the risk of a counter bid," WestLb analyst Jonathan Crozier said.

Heino Ruland, an analyst at Ruland Research, said he sees the acquisition as being way too expensive and said the race for cloud-computing technology was heating up to the point where it seemed market players were spending irrationally just to stay in the game, mirroring the dotcom bubble more than a decade ago.

The price SAP is paying for SuccessFactors represents about eight times forecast 2012 revenues, analysts said, compared with the multiple of about 5.5 that Oracle paid for RightNow.

"The valuation of this deal is high, but reasonable in our opinion, in light of the high-growth, strategic asset that is being acquired," Nomura analyst Rick Sherlund said.

SAP now says it aims to become the world's No. 1 cloud business and plans to get there without more major acquisitions.

"We're going to remain an organic growth company primarily, but where there is an opportunity, a crown jewel in the market like SuccessFactors, and where it can help us become the cloud powerhouse we want to be, you make the move," co-CEO Bill McDermott said on a conference call with analysts and journalists.

SuccessFactors' operating margin jumped to 9 percent in the third quarter from zero a year earlier, and the company said it could not hire quickly enough to meet demand.

SAP raised its sales outlook on the deal, saying its revenue could easily reach 21 billion euros by 2015, about a billion euros more than expected. Its 2012 earnings will be hurt by the purchase, but there will be a positive impact from 2013 on.

SuccessFactors, which first went public at $10 a share four years ago, makes human resources software used by companies to review employee performance.

Shares of Taleo Corp., SuccessFactors' closest rival in the business of offering human resources software over the web, soared 19 percent in Nasdaq trade, rising $6.36 to $39.32.

Shares of Kenexa, another rival in the rapidly growing space, climbed 14 percent to $28.85 on the New York Stock Exchange.

JPMorgan Chase advised SAP on the deal, while Morgan Stanley advised SuccessFactors.

© 2014 Thomson/Reuters. All rights reserved.

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