SAP's SuccessFactors Acquisition: A $1.2 Billion Wealth Transfer?

| About: SAP AG (SAP)

Over the weekend SAP (NYSE:SAP) announced it would acquire US-based SuccessFactors (NYSE:SFSF) for $3.4bn. The deal indicates that SAP is making a serious commitment to their cloud-based strategy. SuccessFactors shareholders are in the clouds since they receive a 52% premium compared to Friday's close.

The deal

SAP will pay $3.4bn for the company or $40 a share. Based on Friday's close at $26.25 the 52% premium that the Walldorf, Germany-based company pays comes close to $1.2bn.

SAP's shareholders seemed disappointed with the price of the deal which is on the high side. SAP is trading 2% lower, losing $1.2bn in market value in a market which is trading up in general. The initial judgment call from the market is that this is mere a wealth transfer from SAP's shareholders to those of SuccessFactors.


Focused on employee management software, the ten-year old company is seeing rapid-growth. Revenues in 2010 totaled $206mn on which the company lost $12mn. Revenues for coming year are expected to come in at $330 million and expected to grow to about $500mn in 2015.

Oracle's RightClick acquisition

Analysts are quick to point out that the acquisition looks expensive compared to the $1.4bn acquisition of RightNow made by Oracle in October. Some are suggesting the acquisition is a defensive move as competitors have been on an acquisition spree already.

Oracle paid just a 22% premium, compared to the 52% SAP is paying. Furthermore, SAP pays 16 times 2010 revenues, compared to Oracle's multiple of 8 times.

Oracle has turned itself into an acquisition machine as it has spent over $40bn over the last five years on numerous acquisitions. SAP has traditionally focused on internal growth and did its first successful acquisition last year when it bought Sybase for $6bn.

Cloud strategy

SAP changed its internal growth strategy towards a more acquisition-based one after former CEO Leo Apotheker left for Hewlett Packard in 2010. Co-CEOs McDermott and Hagemann acquired Sybase just months after Apotheker's resignation. The acquisition of SuccessFactors seems an admission that the internal growth strategy for cloud solutions has been a failure.

SAP is competing with big names such as Oracle, IBM (NYSE:IBM), Apple (NASDAQ:AAPL) and Salesforce (NYSE:CRM) in a fast growing cloud-computing market expected to more than double in size reaching $150bn in 2014 according to research firm Gartner.

While $3.4bn is a high price, it is the right price to pay according to SAP executives. SuccessFactors offers enormous synergies with existing SAP businesses and it is growing at a rapid pace. The acquisition gives SAP a platform and an opportunity to grow a powerhouse by innovations and internal growth.

SAP shareholders have been happy with current management. Shares are up 18% year-to-date. The acquisition might be expensive at first glance, but high potential growth and synergies might create a lot of value for SAP's shareholders down the road if SAP manages to make cloud-computing profitable. As always, it all relies on the execution.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.