By Brenon Daly
After struggling for years to build its own on-demand offering, SAP (NYSE:SAP) plans to buy its way into cloud-based software, handing over $3.65bn for SuccessFactors (NYSE:SFSF) in what would be the largest-ever SaaS acquisition. The deal combines the largest ERP vendor, which has some 500 million users, with the fast-growing human capital management (OTC:HCM) provider. However, the acquisition, which is slated to close in the first quarter of next year, does face some challenges. J.P. Morgan Securities advised SAP on the transaction, while Morgan Stanley banked SuccessFactors, after leading its IPO four years ago.
SAP, which is 30 years older than SuccessFactors, has consistently pulled back the targets for its Business ByDesign SaaS suite since it started talking about it a half-decade ago. The difficulty in moving more quickly into a subscription-based software model is underscored by the fact that even after it drops $3.65bn to make SuccessFactors its cloud-based HCM product, SAP will continue to sell its own existing on-premises talent management offering. In fairness, we had our doubts about SAP’s previous big deal – the $6.1bn purchase of Sybase in mid-2010, which thrust the German giant into a host of new markets, including mobility and databases – but the early returns from that combination have been fairly solid.
However, when we compare SAP’s two most recent significant acquisitions, we can’t help but be struck by one gigantic discrepancy: valuation. SAP is paying a price-to-sales multiple that’s roughly twice as rich for SuccessFactors compared to the one it paid for Sybase. SuccessFactors is projected to do about $330m in sales in 2011, meaning it is garnering a rich 10 times revenue valuation, while Sybase traded at about 5x revenue. Obviously, SuccessFactors’ projected growth of 57% this year goes a long way toward explaining that premium, as does the fact that it’s a subscription-based business with 15 million subscribers. But even when compared with Oracle’s recent purchase of RightNow, which went off at about 6.6x trailing sales, SAP’s move seems pricey.