SAP's Business Intelligence Leap

In the rapidly consolidating business software market, SAP (SAP) has taken a conservative tack, preferring to rely on growth through sales of its own meticulously engineered products. But on Oct. 7, Chief Executive Henning Kagermann ditched his playbook, announcing a $6.8 billion deal to acquire Business Objects that could signal the German software giant's willingness to buy its way into new areas of the corporate software market.
The deal would vault SAP, the world's third-largest software maker, squarely into one of the software industry's hottest sectors. Business Objects (BOBJ) competes in the fast-growing market for software that helps companies plan budgets, close their books, and divine their most profitable customers. Together with an aggressive push by SAP into selling software aimed at small and midsize companies, adding business intelligence to its portfolio could help SAP win new customers at a time when sales growth has slowed for its traditional manufacturing and supply-chain management software. "This is a space where we decided that, with acquisitions, we'll be more successful," Kagermann told reporters and analysts in a hastily arranged conference call from Germany on Oct. 7. "It accelerates significantly our growth potential."
The boards of Walldorf [Germany]-based SAP and Paris-based Business Objects approved the proposed deal after negotiations that ended on the night of Oct. 7 in Germany. SAP will offer 42, or $59.37, in cash per share of Business Objects, an 18% premium over the $50.27 closing price of the shares on Oct. 5, the last day of trading before the acquisition was announced. The deal is expected to close in the first quarter of 2008 and add to SAP's earnings by 2009. [Kagermann said SAP's 2008 earnings will dip by about 7% per share due to one-time costs of buying Business Objects.]
More Large Acquisitions Ahead?
Sales of data analysis software, which includes business intelligence programs, hit nearly $23 billion last year -- about half the size of the market for business applications [which form the core of SAP's business], according to AMR Research. But within the data analysis category, sales of business intelligence software grew 10%, to $6.35 billion, and sales of "scorecard" software that helps executives digest key numbers shot up 26% to $5.2 billion, according to AMR. SAP's bet: that it can combine Business Objects' technology with its own applications to create even more sales opportunities, Kagermann said.
Business Objects' software could help SAP customers extract more insight from their data to make better forecasts, says Joshua Greeenbaum, principal of Enterprise Applications. "They're saying this is going to be one of the key growth areas for SAP," says Greeenbaum. If SAP can make the deal work, it could look to buy growth in other areas, such as banking software, he adds. "This signifies that there is an appetite for very large acquisitions. That's something SAP said was not possible."
The proposed acquisition of Business Objects comes as competitors Oracle (ORCL), IBM (IBM), Hewlett-Packard (HPQ), and Microsoft (MSFT) have stepped up the pace of buyouts in the corporate software sector. Oracle has shelled out $25 billion the last three years to acquire about 30 software companies, and IBM has spent roughly $5 billion on software acquisitions since 2006.
A Target Oracle Dismissed
Oracle had already staked out ground in the business intelligence market, spending $3.3 billion to acquire Hyperion Solutions on Mar. 1 [BusinessWeek, 3/2/07]. That tieup was a particular jab at SAP -- more than half of Hyperion's customers also used software from SAP, according to AMR. Now, SAP has the chance to hit back.
Business Objects has been the subject of acquisition rumors for months. According to a source at Oracle, the company evaluated Business Objects as an acquisition target, but decided to pass. To make an acquisition work, the source said, Oracle would have liked to have kept Business Objects' U.S. engineering staff and cut administrative functions in France. But that would have been difficult given French labor laws.
Now with Business Objects off the market, Cognos (COGN), could be the next software company gobbled up. The business intelligence software maker booked $116 million in profit, on $979 million in revenues, for its fiscal year ended Feb. 28.
Buying into Fast-growing Markets
Other tech industry heavyweights have been attacking the data analysis software market as well. Microsoft acquired software vendor ProClarity in April, 2006, and has developed a new product called PerformancePoint Server based on the technology. A spokeswoman for IBM says the company has partnerships with key business intelligence vendors and will continue looking at acquisitions that add "higher-value middleware to our portfolio." IBM recently raised growth targets for its $18 billion software business to 7% to 10% through 2010 [BusinessWeek, 10/1/07]. Meanwhile, HP has been selling data analysis software called Neoview to customers including Wal-Mart (WMT) and is believed to have considered an acquisition in this area of the corporate software market.
Kagermann told reporters that SAP will stick to its strategy of growing organically in its traditional business applications markets. But the SAP CEO has shown a willingness to open the company's wallet to buy into fast-growing markets. SAP has some currency for acquisitions: It had $2.8 billion in cash and short-term investments on its balance sheet as of June 30. In May, it bought OutLookSoft, a Stamford [Conn.] maker of software for planning budgets and forecasting financial results. And it bought Virsa Systems, which made software to help companies comply with the Sarbanes-Oxley Act, in April, 2006. Kagermann indicated SAP wanted to move even quicker to grab sales of business intelligence software. "I never excluded acquisitions, but from a management point of view, we had so much on our plate," he said during the conference call.
That includes a new suite of low-cost applications delivered over the Internet that SAP launched in September for small and midsize customers [BusinessWeek, 9/19/07]. SAP has set a goal of increasing its customer base to 100,000 by 2010, from 42,000 today. Selling to smaller companies and expanding into new, fast-growing niche markets are pillars of the plan.
Software for the CFO
An SAP spokesman says the company plans to market Business Objects' software to chief financial officers who need to quickly keep track of costs and operational data around the world. SAP sells to about 40% of Business Objects' customers and the companies plan to exploit the overlap, said Business Objects CEO John Schwarz, who is expected to become a member of SAP's executive board. SAP Corporate Officer Doug Merritt, an executive in the company's Palo Alto [Calif.] office, will join the Business Objects unit and report to Schwarz.
After several years of encroachment into SAP's core market by Oracle and others, the Business Objects deal could be a sign that SAP is getting more aggressive about defending its turf.
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