According to the MGI SaaS valuation model, SAP (SAP) did not overpay for its acquisition of SuccessFactors.
There are so many comments about SAP overpaying for SuccessFactors (SFSF) that SAP has started spreading its own rumours about how they had to pay more in order to thwart a competing bid for SFSF. We remain skeptical of the fact of any competing bid. SFSF was never high on our stock list and on numerous occasions we had over the past couple of years pointed out the discrepancies between SFSF valuation and operating parameters. The company was at the top of its peer group in terms of a valuation multiple and near the bottom of the scale in terms of operating efficiency measured by MGI Index. Then, to top it off, the company updated/restated its reported SEC numbers frequently, something that was overlooked by most analysts. All that, combined with a high level of hype surrounding the company, made us uncomfortable with the stock. Yet, with all this baggage, we would be the first ones to point out that at the end of the day SAP did not overpay for SFSF.
Several MGI research reports point out the relationship that exists between growth rate and valuation of SaaS companies. When Oracle (ORCL) acquired RightNow (RNOW), the valuation came in within 5% of that predicted by our SaaS valuation model. A similar chain of events seems to take place now. SAP's take out valuation of SFSF is within 5% of what was predicted by our model (See MGI Research Note "SaaS Valuation: What Price is Right?" published in March of 2011). Over the last four quarters SFSF revenue growth rate vs. the same quarter in the prior year (PYQ) averages to about 55%. Using our valuation model that translates into a revenue multiple of 11.38. SFSF trailing twelve month revenue adds up to about $292 Million. Putting that together, that translates into an theoretical Enterprise Value (EV) of $3.322 Billion. SAP is paying $3.4 Billion for SFSF. The company has about $250 Million in cash and no debt, thus translating into acquisition EV of $3.15 Billion. The theoretical EV exceeds the actual acquisition EV by $172Mil or by about 5% of the actual purchase price paid by SAP.
The ultimate issue for SAP investors and customers is not whether or not SAP is overpaying or underpaying for SFSF. The real issue is what are they going to do with this property and how can they make this deal matter to SAP shareholders. If the acquisition is a success, i.e. SAP grows its cloud presence and creates some clarity for its customers, partners and investors then no one will remember the price paid for this deal. If the deal splashes and then burns out like a roman candle, then SAP will have bigger issues to worry about than the price they paid.