SAP to Buy SuccessFactors for $3.4 Billion

By Ragnhild Kjetland - Dec 4, 2011 5:26 AM GMT+0700

SAP AG (SAP), the largest maker of business-management software, agreed to buy SuccessFactors Inc. for $3.4 billion in cash to keep pace with archrival Oracle Corp. in the cloud-computing market.

SAP will purchase San Mateo, California-based SuccessFactors, which makes software used to manage employee performance, for $40 per share. That's 52 percent more than the closing price in New York trading on Dec. 2, Walldorf, Germany-based SAP said in an e-mailed statement today.

SAP is promoting cloud computing, which lets clients rent software delivered over the Web rather than install it on their own machines, as a safe way to outsource data centers and reduce the need for hardware. The deal comes six weeks after Oracle agreed to buy RightNow Technologies Inc. for $1.5 billion.

“This is a much-needed move by SAP,” Ray Wang, head of San Francisco-based Constellation Research, said in a phone interview. “What SAP had in human resources -- basic transactional software such as payroll -- was good enough for the old era. In the new era, performance reviews and talent management will be important.”

SuccessFactors (SFSF) was founded in 2001 and has more than 3,500 customers with more than 15 million subscribers in 168 countries, according to its website. The U.S. company is predicted to have $502 million in revenue in 2013, up from $332 million this year, according to analysts in a Bloomberg survey.

‘Marvelous Addition’

“We saw Oracle buy RightNow Technologies just a couple of weeks ago at 5.5 times that company’s next year revenue and SAP is going to pay almost 8 times 2012 revenue, said Brendan Barnicle,” an analyst at Pacific Crest Securities in Portland, Oregon. “But these guys are growing much faster than other people in software on demand, this is a marvelous addition for SAP.”

SAP co-Chief Executive Officer Bill McDermott said on a conference call today that the SuccessFactors deal will help SAP achieve its goal of exceeding 20 billion euros in sales in 2015. SuccessFactors founder Lars Dalgaard will join SAP’s board and head the company’s cloud business.

The deal will “slightly” dilute earnings per share in 2012 before adding to profit in subsequent years, the company said. SAP will still be able to reach a 35 percent profit margin by 2015, even as Chief Financial Officer Werner Brandt said that companies that sell software that is accessed over the Internet have a lower margin than other software.

Getting Bolder

McDermott said the “scale” SuccessFactors brings to SAP’s cloud offering will help it maintain the 2015 margin target. The German company expects to complete the transaction in the first quarter of next year.

The SuccessFactors deal shows that SAP co-CEOs McDermott and Jim Hagemann Snabe, who took the helm in February last year, don’t have the same reluctance as the German company’s last two CEOs, Leo Apotheker and Henning Kagermann, to expand through acquisitions.

While Oracle Corp. (ORCL) has spent more than $42 billion on takeovers since the beginning of 2005, SAP had only made only two large acquisitions in its 39-year history before SuccessFactors: Sybase, a maker of mobile-device applications, for $5.8 billion in May last year and business-intelligence company Business Objects for 4.8 billion euros in 2007.

Software Prices

SAP paid a premium of 56 percent for Sybase and 20 percent for Business Objects, based on a 20-day average share price of the target before the purchase was announced, Bloomberg data show. Over the past five years, the average premium paid for 56 North American software targets valued at more than $500 million was 24 percent, the data show.

“The price is high,” said Frank Niemann, a consultant at Pierre Audoin Consultants in Munich. “On the other hand, SAP would not be able to build such a solution with such a success in a reasonable period of time.”

The global market for cloud services may surge to $148.8 billion in 2014 from $68.3 billion in 2010, according to researcher Gartner Inc.

SAP shares have gained 17 percent this year in Frankfurt trading, valuing the company at 54.9 billion euros. SuccessFactors has lost 9.4 percent, giving the company a market capitalization of $2.2 billion.

SAP’s Strategy

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

“We need to make sure we are the leaders in the categories in which we play, and we need to, once every one and a half years or so, add a new category,” Snabe said at the time. “We bet a lot of SAP on one category for many years.”

The purchase of SuccessFactors will be funded from SAP’s existing cash and a 1 billion-euro loan facility, the company said, adding that the SuccessFactors board of directors has unanimously approved the transaction. SAP said it expects the transaction to be completed in the first quarter of 2012.

JPMorgan Chase & Co. is advising SAP and Morgan Stanley is advising SuccessFactors.

Other big makers of cloud software include Salesforce.com Inc. and companies such as Amazon.com Inc. (AMZN) and Dell Inc. (DELL) operate servers on which the on-demand software runs.

“This is a direct message to Oracle and Salesforce, that SAP is clearly not going to be left behind in the cloud,” Gartner Inc. analyst Donald Feinberg said by telephone. “Organic growth is becoming increasingly difficult for companies like SAP, Oracle, IBM and this is definitely a major push in that direction.”

To contact the reporter on this story: Ragnhild Kjetland in Frankfurt at rkjetland@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net