The German software giant is on its way to explore new realms in the software arena after staying away from cloud computing for quite some time; it has finally realized the need of the hour and identified the global trends of netizens and techizens migrating toward the cloud.
This has made the SAP (SAP, Financial) management to start their own voyage to find their space in cloud 9. So how big is this new move? How will it influence the score board of the company? How will it impact the run of the company with its competitors? Letâs take a closer look at SAPâs new movements.
What is SAP doing???
SAP specializes in providing software for companies on their computing networks, but is currently facing intense competition from cheaper rivals that offer services over the internet, or âthe cloudâ. SAP started its chain of acquisitions with the $3.4 billion purchase of SuccessFactors (SFSF, Financial) in 2011 in order to keep pace with the fast-growing internet software pioneers such as Salesforce.com (CRM, Financial) and Workday (WDAY, Financial).
SAP has agreed to buy U.S. expenses software maker Concur (CNQR, Financial) for $7.3 billion in cash, thus strengthening its position in cloud computing arena. The German business software company is going to seal the deal offering at $129 per share for Concur, a 20% premium over the Sept. 17 closing price, and just short of the $130.36 record high Concur shares set in January after a two-year upward run. Based on 57 million outstanding shares, the offer for Concur is valued at $7.3 billion. Including debt, the offer represents an enterprise value of about $8.3 billion.
This is equal to the 20% premium SAP paid for its 2012 acquisition of cloud procurement software maker, Ariba (ARBA, Financial). This is also comparable with the 18% paid by its arch-rival Oracle (ORCL, Financial) for acquiring Taleo (TLEO, Financial) in 2012, and 19% that Oracle paid to bag RightNow (RNOW, Financial) in 2011.
SAP, which competes in cloud computing with global rivals including Oracle, IBM (IBM, Financial) and Salesforce, will finance the Concur acquisition through a credit facility agreement of up to 7 billion euros ($9 billion).
In the words of Bernstein analystsâ - "It seems expensive. But we believe that Concur is the leader in its market and the potential synergies will be a valuable addition."
What will SAP get???
By buying Concur, SAP will not only increase its online products coverage, but will also get to add on the U.S. firm's strength in the travel sector to sell additional software, into its kitty. With this acquisition of Concur, SAP will add another 12 million cloud users to its existing 38 million customer base which is a straight 31% addition to its cloud business.
Addressing a press conference SAP Chief Executive Officer Bill McDermott told analystsâ and reporters - "We have something big hereâŚâ
Concur is joining SAP with a whole range of customer base to offer to SAPâs business books. It has 23,000 clients, which includes companies, governments and universities with a total of more than 25 million users of its trademark travel and expense-management software.
Global business spending on cloud services is expected to jump 20% this year to $174 billion, according to research firm IHS estimates, and would rise to more than $235 billion by 2017.
Concur as a company has a close-knit relationship with service providers of travel services dotting across U.S., giving SAP the potential to capture repeat business from hotel or airline partners that will add to its revenue without having to spend on marketing for capturing new users. About a third of Concur users already bank on SAP software, and the German company expects to add Concurâs entire customer base to its existing customer horizon. With Ariba already in its lockers, SAP by default owns Fieldglass, which allows companies to manage their temporary staff and independent contractors and services. This means SAP will be able to provide the services of Fieldglass to the additional user base coming from Concur, and thereby add to the business numbers from Concurâs customers by offering a varied range of products.
This model could empower SAP to build a tight-knit business travel community in the cloud space; without risking its double-digit margins.
How will this shape SAPâs numbers???
SAPâs think-tank expects to gain between 3 billion euros and 3.5 billion euros in sales from cloud computing by 2017, out of a total of at least 22 billion, but according to CEO McDermott this forecast would tread upwards after closing the Concur acquisition deal.
SAP shares closed at end of trading last Friday at 58.45 euros, 2.4% down - thus leading the current weakness in the European technology index which dropped 0.6%.
The shares of Concur were trading up 18% by 16.37 GMT, after it reported a 28.6% rise in revenue to $178.37 million in the quarter ended June 30. This was remarkable as Concurâs share prices had plummeted by more than 17% since early this year, the drop being majorly due to the declining margins.
Concur is currently trading at 44 times of its expected earnings before interest, tax, depreciation and amortization (EBITDA), against its closest peer Salesforce.com which is trading at 30 times its EBITDA.
The Concur management has unanimously approved the deal of entering into SAP, which is expected to get completed by the end of the first quarter of 2015, subject to shareholder and regulatory approvals. This merger acquisition deal was suggested to SAP by Deutsche Bank (DB, Financial) and Concur was advised by a boutique bank Qatalyst.
What is in it for us???
Though the current run of SAP has not been very encouraging for the investors and analysts, however, with this breakthrough deal SAP will be able to add value to its service line, and will be able to expand its customer base by adding the customers of Concur to its kitty. This will not only ensure incremental margins and enhanced earnings but also will save considerable cost for reaching out to fresh customers, and would also offset the uncertainties of maturing a new prospect into a customer. Thus, it would be best to take our positions in the company at the current beaten down rate and hold them till the SAP-Concur deal goes through, and then start reaping the benefit from such positions taken as on date.
