ERP market leader SAP AG on Saturday announced that its SAP America subsidiary would acquire cloud-based human capital management (HCM) specialist SuccessFactors as part of its plan to create an advanced end-to-end offering of cloud and on-premise solutions for managing business processes.
Bill McDermott and Jim Snabe, co-chief executive officers of SAP (NYSE:SAP), said SAP America would acquire all outstanding shares of SuccessFactors (NYSE:SFSF) common stock for $40 per share in cash, about $3.4 billion. The SuccessFactors board of directors has already unanimously approved the transaction, which represents a 52 percent premium over the Dec. 2 closing price as well as the one month volume weighted average price per share.
SAP said it will fund the transaction from its cash on hand and a €1 billion term loan facility.
"The cloud is a core of SAP's future growth, and the combination of SuccessFactors' leadership team and technology with SAP will create a cloud powerhouse," said McDermott. "The acquisition will help us address the top priority for CEOs globally—managing people and talent. Together, SAP and SuccessFactors will create tremendous business value for customers, with potent synergies to accelerate our growth in the cloud."
SuccessFactors boasts 15 million subscription seats to its service, with more than 3,500 customers in 168 countries. The company recorded 77 percent year-over-year revenue growth in the third quarter of 2011 and 59 percent year-over-year revenue growth in the first nine months of 2011. SAP said there is just 14 percent customer overlap between it and SuccessFactors.
SAP plans to run SuccessFactors as a separate business, much as it has done with its previous Sybase acquisition. The company said SuccessFactors Founder and CEO Lars Dalgaard would take charge of SAP's cloud business portfolio in addition to continuing as CEO of SuccessFactors. Hasso Plattner, chairman of the SAP AG supervisory board, also recommended Dalgaard's appointment to SAP AG's executive board.
"This is a revolutionary combination of proven capabilities that will allow SuccessFactors to accelerate our roadmap by 10 years, and bring the world's leading application knowledge and intellectual property to our customers through the cloud, and the largest applications customer base instantly," Dalgaard said.
As strengths, Dalgaard pointed to SAP's HANA analytics-centric in-memory database, which should allow SuccessFactors to enhance the processing performance of its application, and the existing tight integration with SAP's core enterprise resource planning (ERP) application.
Trip Chowdhry, of Global Equities Research, called it "a timely acquisition by SAP and necessary in the context of Oracle's acquisition of RightNow and soon-to-be launched Oracle Public Cloud. As we have said before, now that every company has a cloud strategy including products and services, cloud computing is not an industry but a necessary feature offering."
Stifel Nicolaus Analysts Tom Roderick and Chris Koh called the acquisition an aggressive move that shows SAP is playing for keeps. They noted the price represents a 2012 estimated enterprise-value-to-sales (EV/Sales) multiple of 8.1x, compared with the EV/Sales multiple of 4.7x EV/2010E Sales that the company paid for database and mobile infrastructure vendor Sybase in 2010.
Roderick and Koh wrote in a research note that the revenue multiple “does look somewhat extravagant.” But SAP has demonstrated the ability to integrate larger acquisitions in recent years with Business Objects and Sybase, and the analysts said they “believe that the synergies between SAP and SuccessFactors are readily apparent and demonstrate a clear shift by SAP from the ‘on-premise’ portion of its ‘on-premise, on-device and on-demand’ mantra toward the cloud."
The two analysts noted that the deal casts some doubt on how SAP intends to handle its homegrown on-demand HCM suite, BusinessByDesign (BBD), going forward. For its part, SAP said it expects BBD to exceed its target of 1,000 customers by the end of the year and asserted that it expects to see demand in the mid-market for full suite SaaS deployments.
Another “natural question,” the analysts said, is how the proposed acquisition will affect SAP’s on-premise business. They suggested the company seems willing to trade some losses in on-premise HCM for better growth overall.
Roderick and Koh said it appears SAP’s goal is to create revenue synergies by tapping the 1 billion strong overall enterprise apps user base rather than shifting entirely away from its existing on-premise solution to an entirely on-demand structure.
The companies said they expect the acquisition to close in the first quarter of 2012, subject to SuccessFactors stockholders tendering at least a majority of the outstanding shares of common stock and clearances by regulatory authorities. SAP said it expects the transaction to be slightly dilutive to its Non-IFRS earnings per share in 2012, but accretive in subsequent years.
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