If you research the history of any large company, you will notice that it likely fits the profile of having acquired its size in one of two ways. Bellwethers such as Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) have long histories of spending heavily in their internal research and development departments to produce top end products such as the iPad or the new processor and at times success surprises such as the Kinect. But the fact of the matter is, at times these efforts fall short of producing items that actually make it to the consumer shelves. When that happens, CEOs opt for the second method of realizing growth – spend money and lots of it.
When competition grows fierce, it’s also considered a win for the opposing team when the opponent is forced into doing something that it probably didn’t consider doing. We saw evidence of this when earlier this year Apple forced Google into a panic purchase of Motorola Mobility (NYSE:MMI). However it plays out, whether or not it proves favorable for Google, Apple forced its hand to compel Google to do something that not only will require time for synergies to be realized, but in the interim Google now has $12.5 billion less in its coffers.
The New Deal
It appears that another corporate hand has just been forced due to strict competition – this time with SAP (NYSE:SAP), which just acquired software-as-a-service firm SuccessFactors (NYSE:SFSF). The deal announced Saturday is reportedly valued at $3.4 billion in cash – a move that I have to say while slightly surprising in its timing, was not unexpected. SuccessFactors shareholders will receive $40 per share from SAP - a premium of 52% above the closing price of Friday 12/2. It is said that SAP will require a loan to supplement its existing capital to finance the acquisition.
As I’ve said, other than the timing, the announced deal was not much of a surprise. This is because database giant Oracle (NYSE:ORCL), a renowned rival to SAP, likely had something to do with its decision. Oracle had recently been on a shopping spree of its own, and SAP felt it needed to respond. As it did with its Sun Microsystems acquisition last year; one that has proven to be extremely fruitful, Oracle once again went on the offense and acquired RightNow CX (NASDAQ:RNOW), the cloud-based customer service experience suite. While forking over less than half the price of what SAP spent for SuccessFactors, it would seem overall that Oracle is not only getting the better value, but also the advantage of forcing SAP to react in a more expensive manner.
Is It Worth It?
I think it is too early to answer that question. As separate entities they were both doing well, but clearly SAP saw something that it realized that it had to acquire – regardless of what motivation Oracle’s deal may have provided. SuccessFactors is arguably the best software-as-a-service (SaaS) company that deals with HR services. It rivals names such as Cornerstone OnDemand (NASDAQ:CSOD) and Taleo (TLEO). While these names are somewhat known, the space however remains relatively untapped. So as noted above, it would seem SAP realizes an opportunity for growth.
In addition to growth, one of the major reasons strategic acquisitions are made involves the advantages related to cross-selling – sometimes it justifies as the only reason. We have seen evidence of this when Hewlett-Packard (NYSE:HPQ), then a printing and network server company with already a large footprint in the enterprise acquired 3COM, the networking component. This move immediately prompted Cisco (NASDAQ:CSCO) to respond by entering the network server business – a decision that now ranks it second only behind only HP after only having been in the business less than three years.
For SAP, I have to say that this deal makes sense because it strengthens its strategy of growing its business intelligence. It realized it was lagging in that category behind not only Oracle, but IBM as well. The question now becomes is the buying spree over or will another firm within this space respond with another acquisition? While IBM is established enough to withstand any temptation outside of its strategy, it will be interesting to see how firms such as Microsoft and HP chose to respond.
There are not many events in the market that are more exciting than an M&A. The rumors alone have cause Sirius XM (NASDAQ:SIRI) to rise recently on the suspicion of a buyout by Liberty Media (LCAPA). In this deal, investors of SuccessFactors came out huge winners with a 52% premium above what they hold for their shares. As this deal may shed some focus on its competitors, opportunistic investors may start to look at names such as the aforementioned Taleo, Kenexa (KNXA) and NetSuite (NYSE:N) as potential targets.
Disclosure: I am long SIRI, AAPL, CSCO, ORCL, MSFT.