SAP extends its cloud reach to buy SuccessFactors for $3.4bn

SAP, THE largest maker of business-management software, has agreed to buy SuccessFactors for $3.4 billion in cash, stepping up competition with arch-rival Oracle in the cloud-computing market.

SAP will pay $40 a share for SuccessFactors, based in San Mateo, California, which makes software used to manage employee performance. That is 52 per cent more than its closing price on Friday, SAP said at the weekend.

The deal extends SAP’s reach in the market for cloud computing, which lets customers rent software delivered over the web rather than install it on their own machines. The company, based in Walldorf, Germany, is promoting the idea as a safe way to outsource data centres and reduce the need for hardware.

The SuccessFactors acquisition comes six weeks after Oracle agreed to buy another cloud competitor, RightNow Technologies, for $1.5 billion.

“This is a much-needed move by SAP,” Ray Wang, head of San Francisco-based Constellation Research, a research and advisory firm focused on technology.

“What SAP had in human resources – basic transactional software such as payroll – was good enough for the old era. In the new era, performance reviews and talent management will be important.”

SuccessFactors has more than 3,500 customers, with over 15 million subscribers in 168 countries. The company is predicted to have $502 million in revenue in 2013, up from $332 million this year, according to analyst estimates.

“We saw Oracle buy RightNow Technologies just a couple of weeks ago at 5½ times that company’s next year revenue, and SAP is going to pay almost eight times 2012 revenue,” said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon.

“But these guys are growing much faster than other people in software on demand; this is a marvellous addition for SAP.”

SAP co-chief executive Bill McDermott said the deal would help SAP to achieve its goal of exceeding €20 billion in sales in 2015.

SuccessFactors founder Lars Dalgaard will join SAP’s board and head up the company’s cloud business. The deal would “slightly” dilute earnings per share in 2012 before adding to profit in subsequent years, the company said.

SAP would still be able to reach a 35 per cent profit margin by 2015, even though companies that sold software accessed over the internet had a lower margin than other software, chief financial officer Werner Brandt said.

The German company expects to complete the transaction in the first quarter of next year.

While Oracle has spent more than $42 billion on takeovers since the beginning of 2005, SAP had only made only two large acquisitions in its 39-year history before SuccessFactors. – (Bloomberg)