News Analysis

Does SAP’s acquisition of SuccessFactors make sense?

Warwick Ashford

SAP has announced plans to acquire human capital management software as a service (SaaS) supplier SuccessFactors, but appears to be paying a hefty premium. Does this acquisition make sense?

SAP has agreed to pay $3.4bn or $40 a share, but this is a 52% premium over the closing share price on the eve of the acquisition announcement and more than ten times the company’s expected revenue for 2011.

But some analysts do not find this is surprising at all. It makes perfect sense, as SAP’s cloud strategy has been struggling with time-to-market issues, said Paul Hamerman, analyst at Forrester Research.

 

Technological benefits

SAP’s core on-premise HR management software has also been at a competitive disadvantage with best-of-breed solutions in areas such as employee performance, succession planning and learning management, he said.

By acquiring SuccessFactors, SAP puts itself into a much stronger competitive position in human resources applications and reaffirms its commitment to software as a service (SaaS) as a key business model, said Hamerman.

He said SAP human capital management (HCM) customers predominantly run best-of-breed talent management solutions alongside SAP core HR management system.

SAP has been working on a SaaS career management offering which was due for release in  2012. But according to Hamerman, this was likely to be too little, too late – hence the urgency for SAP to acquire a leading player with a proven product in the field to help grow and round out its on-demand portfolio, almost immediately.

While SAP’s core HR and payroll offerings provided a solid approach, these applications remained in the systems of transaction world and lacked many of the requirements for systems of engagement, said Ray Wang, principal analyst and chief executive at Constellation Research.

In fact, he said many customers left SAP to go to SuccessFactors. The rise of competitors such as Taleo, Workday and Ultimate Software comes from the lack of general innovation in the HCM space by legacy vendors such as Oracle, PeopleSoft and SAP. 

“Cloud computing provided the opportunity to deliver rapid innovation to customers. Consequently, existing customers will welcome the move while best-of-breed purists will have to overcome the surprise and determine how innovative they expect SAP to become in HCM,” said Wang.

SuccessFactors also brings enhanced social expertise, which Wang indicated as a key area that SAP needs to bolster at the recent UK and Ireland SAP User Group Conference in Birmingham.

SuccessFactors’ CubeTree acquisition provides some basic social features and a solid set of pre-built integrations to many consumer and enterprise products including Twitter, Google Docs and Google Reader, Salesforce.com, WebEx and Basecamp, he said

 

Revenue opportunities

The technological benefits are clear, but does the acquisition still make sense financially for SAP?

Even though SAP is paying a premium, not only does the acquisition deliver much-needed technology and expertise, it could also give SAP a financial boost were it is needed, according to Hamerman.

Despite SAP’s recent run of positive financial results, he pointed out that subscription revenue in the first 9 months of 2011 has been flat and represents only 3.7% of total software revenues. However, with the addition of SuccessFactors, which grew 42% last quarter, SAP’s on-demand (SaaS) revenue will get a boost, he said.

Although SAP leadership has been at pains to emphasise that strategic acquisition should be about new technologies, not install bases, Forrester Analyst Liz Herbert pointed out that the acquisition will create more integration possibilities with SAP’s enterprise applications, in-memory computing platform (HANA) and mobile computing platform (Sybase) for SuccessFactors’ more than 15 million subscribers, accelerating SAP’s move into cloud computing.

The acquisition provides SAP with massive cross-selling and hence revenue-generating opportunities for other cloud applications and analytics, said Wang.

SAP believes the SuccessFactors offerings will be attractive to more than 500 million employees of SAP customers, and SAP’s 15,000 HCM deployments (not customers) could potentially go for one-stop shopping from SAP to save themselves the hassle of integrating different cloud platforms, he said.

 

Pricing and contract terms

While there are great opportunities and synergies with this acquisition, Forrester’s Liz Herbert warns that it also runs the risk of downsides for customers, namely that pricing and contract terms are likely to change and the pace and direction of innovation could slow down as the provider moves from a nimble, niche supplier to a new parent company with many competing initiatives.

The bottom line for existing and prospective customer is to proceed with caution, said Wang. He also recommends shoring up existing concessions and agreements with SuccessFactors, using the opportunity to add licences if necessary, make contract revisions, and secure commitments on product enhancements. “Now is the best time to negotiate a deal,” he said.

Existing and prospective customer should also seek clarity on the future cloud road map and how SAP will handle cloud-based integration at the process, data, and metadata, said Wang. SuccessFactors customers who are not SAP customers should take the opportunity to explore some of the other line-of-business cloud offerings.

This acquisition and many others show why large enterprise software companies such as SAP must acquire for innovation in order to grow top line revenue, said Wang.

For enterprise software, Oracle, Salesforce.com, IBM and SAP must place bets on the five pillars of consumer technology entering the enterprise to remain relevant and grow, he said.

These pillars are mobile, social, cloud, analytics and unified communications.

According to Wang, SAP has built a solid foundation in analytics and has made forays into cloud and mobile, but this acquisition will help move it further along in cloud.

However, he believes SAP will have to do more in social, where SuccessFactors’ CubeTree may help, and mobile to move forward. 

The final piece – unified communications – Wang said may come from a partnership with Cisco and Microsoft instead of an outright acquisition or organic development.


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