On Sunday, October 7, 2007, SAP AG (NYSE: SAP) announced an agreement to acquire Business Objects (Nasdaq: BOBJ) via a cash tender offer valued at EUR4.8 billion. The acquisition of Business Objects was not unexpected – the company has been in on-again, off-again conversations with Oracle (Nasdaq: ORCL) and other potential suitors for many months. The French press had leaked news of the SAP/BOBJ dialogue several weeks ago.
Given what is on SAP's plate today and its lack of experience in successful large scale merger integration, - this announcement is actually a short-term positive for Oracle and other BI incumbents such as Actuate, Cognos and Microstrategy. The transaction raises several key issues:
• Did SAP feel that its internal, organically grown initiatives will not support its goal of doubling its addressable market by 2010?
• Did SAP act defensively to thwart perceived interest in Business Objects by Oracle and others?
• Does SAP believe that by acquiring Business Objects it cuts into the Oracle customer base in a strategically meaningful way?
• Did SAP pay too much for technology that is either at its peak or will require significant investment in the next five years?
• Could SAP have achieved some of its goals more cost effectively by taking advantage of many open source technology components looking for a stable corporate home?
• Given its profile of doing acquisitions, will SAP be successful in consummating the deal and absorbing the company?
• What is the impact of product overlap between the two companies on customers?
SAP's acquisition of Business Objects is a bold move that clearly signals SAP's perception that in order to achieve its growth objectives it will need to continue mixing large acquisitions with organic development efforts like SAP BBD (see MGI analysis here). To the extent that the deal is a pre-emptive counterattack on Oracle, we feel that Oracle's interest in Business Objects may have been far less than perceived by SAP. The justification for this transaction has to stand on its own feet in areas such as technology, access to new non-SAP customers, distribution, cross-selling, revenue growth, efficiency and profitability. One should discount any notion that SAP would do a nearly $6.8 Billion transaction to get access to BOBJ executive talent. While it may be easy to extrapolate from this transaction that SAP took a page from Oracle's "Big Acquisition Playbook", we remain rather sanguine on this point as we see SAP being more opportunistic and defensive rather than proactively seeking large new deals. In spite of the high cost, we see the SAP-BOBJ marriage as a positive for both companies. On a combined basis, BOBJ fills a gap in SAP's product portfolio and gives SAP product and credibility in the growing market for business intelligence [BI]. BOBJ's portfolio of business intelligence and reporting tools is broad and robust. By comparison, SAP's own business intelligence [BI] tools, while not trivial, are certainly reflective of the fact that SAP is first and foremost an application suite provider.
Most large SAP accounts are also large Business Objects customers. With a global installed base of 35,000+ companies and a formidable brand and sales force, SAP will have numerous opportunities to promote and cross-sell Business Objects products. BOBJ gives SAP a meaningful Silicon Valley presence and proven business intelligence/reporting solution in a category that SAP was never able to gain a leading position. ORCL has a low probability of playing a spoiler in this deal – Oracle was recently ranked #1 in BI by IDC, and would undergo heavy scrutiny by the US Dept of Justice if it was successful in hitting the winning price for BOBJ. Oracle has done exhaustive analysis on a BOBJ acquisition – and passed on the deal. While Larry Ellison, Chuck Phillips and Safra Catz would love to rain on SAP's parade, - most likely they will hold fire (p=.9 probability – i.e. it would take an act of God or Larry Ellison to change this). For SAP, the risk factors in this purchase are material. An acquisition of this magnitude is un-trodden ground for SAP.
While SAP has made numerous small acquisitions (Khimetrics, Versa, Wicom, et al), none had truly global operations and revenues greater than $1 billion. SAP's current management team does not field anyone with hands-on experience of absorbing transactions of this size. SAP's TopTier (NetWeaver) experience was hardly positive. SAP founder Hasso Plattner was a force in establishing the SAP Labs in Palo Alto, CA, and pushing the TopTier acquisition which brought forward the NetWeaver technology and former SAP executive Shai Agassi. Today, SAP Labs in Silicon Valley is a shell of its former self, with the TopTier/Shai Agassi-era personnel gone. Even though SAP has labs around the world, the company has not proven its ability to innovate on a large scale beyond Walldorf, Germany. Within the SAP competitive landscape, this deal highlights the fundamental difference between SAP and Oracle in terms of their respective strategic growth plans. Oracle is firmly set on Buy-Integrate-Leverage (NYSEARCA:BIL) approach while SAP is one of Build-Buy-Integrate [BBI] with Build being the dominant theme of its strategy.
As past MGI Research reports have indicated, the two companies have divergent strategies and operating models. SAP announced plans to maintain BOBJ as an independent unit (we give this a year to play out) and still expects the deal to be accretive in 2009. While it is possible for SAP to make the BOBJ deal accretive sooner, SAP's stated hands-off approach to integration of BOBJ is reflective of how much is on the plate for SAP management in the next two years. The other question worth considering is the price that SAP is paying for BOBJ vis-a`-vis the benefit to SAP. BOBJ does bring a proven brand, technology and customer base to SAP. But SAP also has all of those in spades plus a great sales channel. If SAP felt that it was lacking somewhat in BI tools vs. Oracle – an issue that had potential to become more strategic, then there were many other options including acquisition of other BI vendors, and exploding variety of open source components that deliver many of the same functions as those provided by BOBJ products. Many of the BOBJ products, like Crystal Reports, will require add-on capital investment just to maintain their maintenance revenue streams, let alone grow.
We believe it could be a while before investors see a meaningful return on the BOBJ acquisition as SAP will vacillate between intent to keep BOBJ independent and the need to leverage distribution channels and harvest cost reductions. Contrast this to Oracle's ability to make its Hyperion acquisition accretive in less than a year. Oracle's MGI Index scores, a measure of corporate efficiency, have improved y/y since Oracle began its acquisition binge. SAP, on the other hand, has been gradually declining in corporate efficiency as its MGI Index scores have been falling. Between significant R&D and marketing investments in BBD and the complex task of integrating BOBJ customers, products and staff, SAP will need to keep a sharp eye on maintaining profitability and market share metrics. For its part, Oracle has proven its ability to compete against Business Objects and SAP on a stand-alone basis. Other than traditional nods to potential cross-selling, nothing in Sunday's announcement indicates that in the short to medium term the combined SAP/BOBJ entity would be able to materially change the playing field. After the deal gets completed, SAP will need to move aggressively to outline a realistic product and marketing integration plan for BOBJ.
Bottom Line: With Business Objects SAP acquires a leading business intelligence brand with a significant customer base. The acquisition price is high, many of the technological components could have been obtained for far less by leveraging the open source components and the combined entity may prove not necessarily more competitive and/or more efficient than the individual companies or the competition. SAP's MGI Index scores have been declining and BOBJ's efficiency ranking has been average. Within twelve months of the transaction, SAP's current integration plan for BOBJ may have to give way to practical economic realities. If SAP can demonstrate a newfound ability to efficiently integrate a business like BOBJ, then SAP/BOBJ could emerge as a threat to Oracle in the 2009 timeframe. Lacking experience in integrating a large, predominately Silicon Valley-based business, SAP will have difficulty digesting Business Objects, thus creating at least a short term opportunity for Oracle and the other BI-focused software companies like Cognos, Actuate, and Microstrategy.