SAP AG’s (SAP) American subsidiary, SAP America, Inc. acquired SuccessFactors (SFSF), a leading California-based provider of cloud-based human capital management solutions. SAP intends to acquire all outstanding shares of SuccessFactors, the enterprise value of which adds up to approximately $3.4 billion.
The deal is an all-cash transaction valued at $44.00 a share. SAP is paying a 52% premium for the shares of SuccessFactors.
The acquisition is expected to bring SuccessFactors’ competitive technological team to SAP’s powerful cloud assets, thereby speeding up SAP’s drive as a provider of cloud applications, platforms and infrastructure. Therefore, the combination of SAP and SuccessFactors will ascertain highly developed offering of cloud and on-premise solutions for managing all important business functions.
Through this acquisition, SAP is also expected to meet its existing goal of 1,000 cloud customers by the end of 2011. Cloud computing contributed just about 2% of SAP’s total revenue in fiscal 2010, (approximately $335 million).
Comparatively, SuccessFactors reported revenue worth $205.9 million in fiscal 2010 and is also in the process to achieve its goal to double its revenue to $400 million by 2011. SuccessFactors has an active subscriber base of 15 million, comprising primarily the corporate clientele in 168 countries. Its portfolio includes talent and recruiting management, goal and performance reviews, business execution and even senior executive succession planning.
SuccessFactors’ focused cloud applications are expected to integrate efficiently and set off well with SAP’s core business strengths. Apart from SAP’s established solutions for talent management and work force analytics, its core services also include human resources, payroll and shared services delivery.
SAP at present has over 15,000 human capital management deployments, through which it reaches over 500 million employees, all of which would have a likely interest in the new cloud offerings provided by SuccessFactors.
The SuccessFactors deal is expected to be marginally dilutive to SAP’s earnings for fiscal 2012 but would become accretive in subsequent years. The company has a revenue goal of $26.9 billion by 2015, an improvement of over $10 billion reported last year.
According to Paul Hamerman, an analyst at Forrester, a technology research group, the acquisition of SuccessFactors, has enabled SAP to position itself competitively in human resource applications.
Forrester also expects the cloud computing market to expand six-fold from its current volume of $40 billion, to more than $240 billion by 2020. Software providers are today more inclined to shift their offerings into the cloud, thereby reducing leverage on the conventional on-site systems.
Customers are also becoming more watchful of the benefits in terms of cost, scalability and continuous upgrades availed on solutions that reside on the Web rather than within their own servers. Unlike installed software, cloud applications have no upfront cost since they are often deployed on a subscription basis. Moreover, with companies such as Google (GOOG) and Amazon (AMZN) making great stride in cloud computing, security has become much less of a barrier.
In the chase for a share of the cloud computing growth pie, SAP was seen as lagging behind its competitors, especially its archrival, Oracle Corporation (ORCL), with whom it competes on the basis of customers. In October 2011, Oracle acquired RightNow Technologies for $1.5 billion.
SAP’s acquisition of SuccessFactors is debatably a move that ensures its continued presence in a battlefield for increased digital footprint and users. SAP and its competitors, such as Oracle and IBM (IBM) are not only competing with Salesforce.com, Inc. (CRM), which is currently the market leader by volume in the customer relationship cloud computing segment, but are also increasingly competing with companies like Google and Facebook (though not on the same basis).
We believe that competition will continue to increase in cloud computing markets. Niche companies such as SuccessFactors, which are easy to integrate within existing or new product lines will be the primary acquisition targets going forward, in our view. We also believe that companies with significant free cash flow will have an upper hand over the long term.
SAP currently has a Zacks #3 Rank which implies short term (1-3 months) Hold rating.
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