Lars Dalgaard, Founder and CEO
Despite the morose economic climate, Tech M&A continued to grow in the third quarter of 2011: $56.5 billion according to a November report from Ernst & Young, up 22 percent from a year ago.
According to E&Y, that total value was the highest for any quarter since 2007, with big deals such as Google/Motorola and HP/Autonomy leading the way.
The fourth quarter is showing some serious action too, with the announcement of an all cash $3.4 billion acquisition by SAP of SuccessFactors, a fast growing provider of cloud-based human capital management (HCM) solutions.
According to E&Y, that total value was the highest for any quarter since 2007, with big deals such as Google/Motorola and HP/Autonomy leading the way.
The fourth quarter is showing some serious action too, with the announcement of an all cash $3.4 billion acquisition by SAP of SuccessFactors, a fast growing provider of cloud-based human capital management (HCM) solutions.
THE FACTS
On December 03, 2011, SAP and SuccessFactors, Inc. announced a definitive merger agreement under which SAP (America) will offer to acquire all outstanding shares of common stock of SuccessFactors for $40.00/per share in cash, representing an enterprise value of approximately $3.4 billion, with a 52% premium over the market.
Upon completion of the transaction, the CEO of SuccessFactors, Lars Dalgaard, will lead the cloud business of SAP in addition to his responsibility as CEO of SuccessFactors, which will remain a standalone unit.
According to Bill McDermott, SAP Co-CEO: “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. “ McDermott added: “the acquisition will help us address the top priority for CEOs globally – managing people and talent.”
The transaction is expected to close in the first quarter of 2012
Upon completion of the transaction, the CEO of SuccessFactors, Lars Dalgaard, will lead the cloud business of SAP in addition to his responsibility as CEO of SuccessFactors, which will remain a standalone unit.
According to Bill McDermott, SAP Co-CEO: “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. “ McDermott added: “the acquisition will help us address the top priority for CEOs globally – managing people and talent.”
The transaction is expected to close in the first quarter of 2012
DUQUESNE GROUP ANALYSIS
Overall, we see this deal as somewhat “pricey” but arguably justifiable. It certainly shows that SAP, a usually slow moving and traditional company, is finally getting serious about the new world of Software-as-a-Service (SaaS) but will need to address both product and ecosystem questions. A particularly interesting angle is that they are also getting the charismatic Lars Dalgaard as the head of all SAP cloud business.
A somewhat “pricey” deal
In today’s volatile market, the 52% premium does not mean much. Valuation multiples are more significant, especially revenue valuation multiples since fast growing software companies often run losses in their early years.
SuccessFactors is projected to do about $330m in sales in 2011, implying a fairly steep multiple of 10 times revenue. That number is roughly twice the multiple that SAP paid in 2010 for Sybase, admittedly a much more mature business.
The obvious comparison is with Oracle’s recent purchase of RightNow Technologies, a provider of tech support and salesforce automation tools, at about 6.6 times sales.
Of course, deals for small but high growth software companies are often done at high revenue multiples, and SuccessFactors’ projected growth of 57% this year is indeed impressive. It also has a strong Board level value proposition: human capital management to improve successful “execution” of business decisions.
Just as important, however, may be the “strategic fit” of SuccessFactors with SAP, as the German software giant comes to grip with the SaaS cloud delivery model.
SuccessFactors is projected to do about $330m in sales in 2011, implying a fairly steep multiple of 10 times revenue. That number is roughly twice the multiple that SAP paid in 2010 for Sybase, admittedly a much more mature business.
The obvious comparison is with Oracle’s recent purchase of RightNow Technologies, a provider of tech support and salesforce automation tools, at about 6.6 times sales.
Of course, deals for small but high growth software companies are often done at high revenue multiples, and SuccessFactors’ projected growth of 57% this year is indeed impressive. It also has a strong Board level value proposition: human capital management to improve successful “execution” of business decisions.
Just as important, however, may be the “strategic fit” of SuccessFactors with SAP, as the German software giant comes to grip with the SaaS cloud delivery model.
SAP gets serious about SaaS, but questions remain
Like it or not, the big established software companies are having to face the reality that the SaaS delivery model is not going to go away and is only going to get bigger.
SAP has over 176 000 customers worldwide but has had only limited success with its own SaaS offer, the Business by Design software aimed at mid-sized companies. Market acceptance of Business by Design has been underwhelming, and SAP recently reiterated its (very) modest objective of 1,000 customers on Business by Design by year-end.
Many observers have underscored that the German company risked losing ground to its competitors. As noted earlier, US rival Oracle recently announced a $1.5 billion deal to buy cloud computing firm RightNow Technologies. Salesforce.com, the SaaS pioneer, remains the market leader.
SuccessFactors - with 3,500 customers and 15 million users in 168 countries - is widely considered to be the second-biggest pure play SaaS firm, second only to Salesforce.com. With this acquisition, SAP appears to be taking the cloud delivery problem seriously.
It does, however, raise some questions.
The first concerns the positioning and sale of multiple products in more or less the same enterprise market space. SAP already has an on premises HR offering. How will the SAP sales force explain to customers when to use the on premises offering and when to go with the new SaaS solution, especially given the differences in pricing?
The second question concerns the ecosystem. As recently as September 2011 in Bonn, Rainer Zinow, the head of Business By Design, told us that SAP had no medium term intention of continuing to operate SaaS data centers (at least for Business by Design), preferring that cloud delivery be ensured by partners like T-Systems and other operators. We could also mention that SAP and IBM announced a partnership in September of this year to deliver the SAP CRM solution from the IBM cloud. Given SAP’s stated ambition to become a “cloud powerhouse”, what will be the role of its partners in solutions delivery?
SAP has over 176 000 customers worldwide but has had only limited success with its own SaaS offer, the Business by Design software aimed at mid-sized companies. Market acceptance of Business by Design has been underwhelming, and SAP recently reiterated its (very) modest objective of 1,000 customers on Business by Design by year-end.
Many observers have underscored that the German company risked losing ground to its competitors. As noted earlier, US rival Oracle recently announced a $1.5 billion deal to buy cloud computing firm RightNow Technologies. Salesforce.com, the SaaS pioneer, remains the market leader.
SuccessFactors - with 3,500 customers and 15 million users in 168 countries - is widely considered to be the second-biggest pure play SaaS firm, second only to Salesforce.com. With this acquisition, SAP appears to be taking the cloud delivery problem seriously.
It does, however, raise some questions.
The first concerns the positioning and sale of multiple products in more or less the same enterprise market space. SAP already has an on premises HR offering. How will the SAP sales force explain to customers when to use the on premises offering and when to go with the new SaaS solution, especially given the differences in pricing?
The second question concerns the ecosystem. As recently as September 2011 in Bonn, Rainer Zinow, the head of Business By Design, told us that SAP had no medium term intention of continuing to operate SaaS data centers (at least for Business by Design), preferring that cloud delivery be ensured by partners like T-Systems and other operators. We could also mention that SAP and IBM announced a partnership in September of this year to deliver the SAP CRM solution from the IBM cloud. Given SAP’s stated ambition to become a “cloud powerhouse”, what will be the role of its partners in solutions delivery?
Lars Dalgaard to lead the cloud business of SAP
A particularly interesting angle is that Lars Dalgaard, Founder and CEO of SuccessFactors, will become the head of all SAP cloud business.
Originally from Scandinavia, Lars Dalgaard has achieved considerable recognition in Silicon Valley as an extraordinarily charismatic and successful entrepreneur. For example, he was chosen as “Best CEO of a large company” in the 2010 San Francisco Business Times Innovation and Technology Awards, and E&Y “Entrepreneur of the year” in 2009.
He is also known for ferocious customer centricity. He has been quoted as saying that “the big software companies don't have a clue, because they stopped listening to their customers a long time ago." They just don’t understand that “the customer must win.”
His proudest claim is that all of the SuccessFactors software was designed and built in close collaboration with customers, an approach that industry luminary Patty Seybold has called “customer co-innovation”.
True to form, he is boundlessly enthusiastic about the deal with SAP, calling it “revolutionary combination” destined to become “legendary”. He has no doubt that the world is ready for enterprise-class cloud applications and that together with SAP, “we can deliver incredible new innovation for global businesses.”
As the future head of SAP cloud business, he will have a big part of the responsibility for keeping those promises.
Originally from Scandinavia, Lars Dalgaard has achieved considerable recognition in Silicon Valley as an extraordinarily charismatic and successful entrepreneur. For example, he was chosen as “Best CEO of a large company” in the 2010 San Francisco Business Times Innovation and Technology Awards, and E&Y “Entrepreneur of the year” in 2009.
He is also known for ferocious customer centricity. He has been quoted as saying that “the big software companies don't have a clue, because they stopped listening to their customers a long time ago." They just don’t understand that “the customer must win.”
His proudest claim is that all of the SuccessFactors software was designed and built in close collaboration with customers, an approach that industry luminary Patty Seybold has called “customer co-innovation”.
True to form, he is boundlessly enthusiastic about the deal with SAP, calling it “revolutionary combination” destined to become “legendary”. He has no doubt that the world is ready for enterprise-class cloud applications and that together with SAP, “we can deliver incredible new innovation for global businesses.”
As the future head of SAP cloud business, he will have a big part of the responsibility for keeping those promises.
CONCLUSION
The acquisition of SuccessFactors is perhaps this year’s single most interesting TECH M&A deal.
SAP paid a fairly stiff price, but the premium is arguably justified by what’s at stake. The German software giant is taking SaaS seriously as an emerging mainstream delivery model, although issues remain around product positioning and ecosystem roles. Lars Dalgaard is an audacious choice to head up the company’s cloud business, but there is no lack of risks.
It’s much to early to predict how all of this will turn out, but we will be following SAP’s big move into SaaS with considerable interest in 2012.
SAP paid a fairly stiff price, but the premium is arguably justified by what’s at stake. The German software giant is taking SaaS seriously as an emerging mainstream delivery model, although issues remain around product positioning and ecosystem roles. Lars Dalgaard is an audacious choice to head up the company’s cloud business, but there is no lack of risks.
It’s much to early to predict how all of this will turn out, but we will be following SAP’s big move into SaaS with considerable interest in 2012.
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