SAP on the Cloud Bandwagon - Analyst Blog
December 08 2011 - 10:25AM
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SAP AG’s (SAP) American subsidiary, SAP
America, Inc. acquired SuccessFactors (SFSF), a
leading California-based provider of cloud-based human capital
management solutions. SAP intends to acquire all outstanding shares
of SuccessFactors, the enterprise value of which adds up to
approximately $3.4 billion.
The deal is an all-cash transaction valued at $44.00 a share.
SAP is paying a 52% premium for the shares of
SuccessFactors.
The acquisition is expected to bring SuccessFactors' competitive
technological team to SAP's powerful cloud assets, thereby speeding
up SAP's drive as a provider of cloud applications, platforms and
infrastructure. Therefore, the combination of SAP and
SuccessFactors will ascertain highly developed offering of cloud
and on-premise solutions for managing all important business
functions.
Through this acquisition, SAP is also expected to meet its
existing goal of 1,000 cloud customers by the end of 2011. Cloud
computing contributed just about 2% of SAP’s total revenue in
fiscal 2010, (approximately $335 million).[1]
Comparatively, SuccessFactors reported revenue worth $205.9
million in fiscal 2010 and is also in the process to achieve its
goal to double its revenue to $400 million by 2011. SuccessFactors
has an active subscriber base of 15 million, comprising primarily
the corporate clientele in 168 countries. Its portfolio includes
talent and recruiting management, goal and performance reviews,
business execution and even senior executive succession
planning.
SuccessFactors’ focused cloud applications are expected to
integrate efficiently and set off well with SAP's core business
strengths. Apart from SAP’s established solutions for talent
management and work force analytics, its core services also include
human resources, payroll and shared services delivery.
SAP at present has over 15,000 human capital management
deployments, through which it reaches over 500 million employees,
all of which would have a likely interest in the new cloud
offerings provided by SuccessFactors.
The SuccessFactors deal is expected to be marginally dilutive to
SAP’s earnings for fiscal 2012 but would become accretive in
subsequent years. The company has a revenue goal of $26.9 billion
by 2015, an improvement of over $10 billion reported last year.
According to Paul Hamerman, an analyst at Forrester, a
technology research group, the acquisition of SuccessFactors, has
enabled SAP to position itself competitively in human resource
applications.
Forrester also expects the cloud computing market to expand
six-fold from its current volume of $40 billion, to more than $240
billion by 2020. Software providers are today more inclined to
shift their offerings into the cloud, thereby reducing leverage on
the conventional on-site systems.
Customers are also becoming more watchful of the benefits in
terms of cost, scalability and continuous upgrades availed on
solutions that reside on the Web rather than within their own
servers. Unlike installed software, cloud applications have no
upfront cost since they are often deployed on a subscription basis.
Moreover, with companies such as Google (GOOG) and
Amazon (AMZN) making great stride in cloud
computing, security has become much less of a barrier.
In the chase for a share of the cloud computing growth pie, SAP
was seen as lagging behind its competitors, especially its
archrival, Oracle Corporation (ORCL), with whom it
competes on the basis of customers. In October 2011, Oracle
acquired RightNow Technologies for $1.5 billion.
SAP's acquisition of SuccessFactors is debatably a move that
ensures its continued presence in a battlefield for increased
digital footprint and users. SAP and its competitors, such as
Oracle and IBM (IBM) are not only competing with
Salesforce.com, Inc. (CRM), which is currently the
market leader by volume in the customer relationship cloud
computing segment, but are also increasingly competing with
companies like Google and Facebook (though not on the same
basis).
Conclusion
We believe that competition will continue to increase in cloud
computing markets. Niche companies such as SuccessFactors, which
are easy to integrate within existing or new product lines will be
the primary acquisition targets going forward, in our view. We also
believe that companies with significant free cash flow will have an
upper hand over the long term.
SAP currently has a Zacks #3 Rank which implies short term (1-3
months) Hold rating.
[1]http://www.minyanville.com/businessmarkets/articles/sap-successfactors-sfsf-cloud-computing-cloud/12/5/2011/id/38220
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