In a departure from its organic growth strategy, SAP AG yesterday announced plans to acquire business intelligence software provider Business Objects SA for $6.78 billion in cash.
The deal, described as a "friendly takeover" by both SAP and Business Objects, is expected to become final in the first quarter of 2008, pending an official tender offer and approvals by various regulatory agencies, including the U.S. Securities and Exchange Commission.
SAP CEO Henning Kagermann, at a press conference today to announce the deal, said Business Objects would operate as a stand-alone entity within SAP. That structure, he said, will enable Business Objects to sell its BI software to SAP and non-SAP customers.
"We will not force Business Objects to SAP technology," Kagermann said. "They should be agnostic and run on nearly every technology environment, as they are doing today."
The planned acquisition represents a shift from the company's adamantly held position that, unlike its principal competitors, it did not need to engage in major acquisitions in order to meet its growth objectives. SAP, in recent quarters, has contented itself with small, tuck-in acquisitions of strategic technology providers, such as corporate performance management software vendor OutlookSoft, acquired in May.
Rivals Oracle and Infor Global Solutions, meanwhile, have pursued aggressive growth-through-acquisition strategies. Oracle has bought more than 30 companies in less than three years, among them PeopleSoft and, in April, BI vendor Hyperion for $3.3 billion.
Infor, meanwhile, has acquired 31 companies — including SSA Global, over the past four years.
Kagermann, speaking at the press conference, said SAP decided to break from its organic growth strategy in order to meet its overall growth objectives. SAP has said its goal is to double its customer base to 100,000 between 2005 and 2010. To do that, Kagermann said, SAP must exploit the fast-growing market for what he called business user solutions — software such as analytics and other BI tools that are used by a wide variety of business users but have been thought of as separate from transactional systems such as ERP, which is SAP's strength.
According to a recent report from Forrester Research, BI is the number one area for new license growth in the packaged application market over the next year. Forty-one percent of surveyed companies plan to purchase or upgrade BI software, and 13% said they plan to purchase BI for the first time.
While SAP is the market leader in enterprise applications for large and mid-market companies, "with the business user it is different," Kagermann said. "Here we have some innovations, but we have to accept that, in that market, there are other leaders that have started from the beginning to focus on this segment. We felt doing an acquisition of the market leader is an important strategic move."
Kagermann acknowledged that an acquisition the size of Business Objects is something new for SAP. "We have proven that we can be an innovator in the market from the technology and application side," Kagermann said. "We have proven we can make tuck-in acquisitions. Now we are on our way to prove that we can also make larger acquisitions."
Kagermann, however, denied that the deal was a reaction to Oracle's acquisition of Hyperion. Oracle's acquisition spree has not cut into SAP's market share, Kagermann asserted, "so there is no need for reaction here."
The acquisition will help SAP quickly shore up its shortcomings in BI product offerings, said Dave Kasabian, research director at AMR Research. While SAP claims to have 14,000 customers for its Business Warehouse BI tools, the company to date has not been able to attract many customers outside of its enterprise applications customer base to the BW platform.
"Being platform-agnostic is Business Objects' strong suite," Kasabian said. "If SAP wanted to expand its footprint in BI, it needed to provide the option of tools that extend outside of its core user base."
SAP officials provided few details on how the Business Objects tools will be integrated with SAP platforms such as BW and the company's enterprise applications, other than to stress that the Business Objects products won't be subsumed under SAP's NetWeaver technology stack, which includes BW. While some of Business Objects' core technologies may make sense as part of the NetWeaver stack, "we won't bring all the products of Business Objects into the NetWeaver stack," Kagermann said.
SAP does plan to use Business Objects data integration and analytical tools to embed analytics in SAP's application suite. "We can now deliver business processes that are enriched by analytical applications," Kagermann said. "And, in the end, we can bring more closed-loop process decision support to the market."
Kagermann said SAP also would use Business Objects' BI expertise to add industry-specific analytics to its application environment. The company already has begun to do so for users of its Government Risk and Compliance products, he noted.
Business Objects would benefit by gaining access to SAP resources, particularly its large installed customer base and presence in Asia where Business Objects does not do much business, Business Objects CEO John Schwarz said at the press conference. Forty percent of SAP's customers already use Business Objects products, Kagermann estimated.
At the same time, Business Objects will be able to take advantage of SAP technologies, such as its BI Accelerator in-memory query product and its Master Data Management platform.
Both Business Objects and SAP would also benefit from the combined strength of the two companies' reseller partner networks, which, following the acquisition, would number about 5,000, Schwarz said.
Contrary to published reports, Schwarz denied that Business Objects had been seeking a buyer for some time prior to attracting interest from SAP. "There were lots of rumors in the marketplace about us being shopped or looking to be acquired," Schwarz said. "That was not correct. We did not go out to be acquired, but we did respond to what was a very positive offer from SAP."
Schwarz blamed those rumors in part for Business Objects' announcement yesterday — following the acquisition news — that it would revise its third-quarter earnings projections downward from a range of 16 cents to 20 cents per share to a range of 4 cents to 6 cents per share. Business Objects downgraded its revenue projections from between $382 million and $387 million to between $366 million and $370 million.
Schwarz said Business Objects had revealed the adjustments to SAP as part of the acquisition negotiations.
Securities markets responded negatively to the deal, which, at $59 for each Business Objects share, represented a 20% premium over the company's stock price as of yesterday. An hour before today's closing bell, SAP's shares were down $3.36 to $55.87. Business Objects' shares were up $7.20 to $57.47.
Kagermann, speaking to reporters, said reaction was negative because the market had not been educated about the deal. "Once the market understands the benefits of this deal, it will give us the credit," he predicted.
SAP said it expects the Business Objects addition to be accretive to its financial results beginning in 2009. In 2008, the company said, it expects one-time acquisition expenses to result in a mid-single-digit decrease in SAP's earnings per share on a GAAP basis.
SAP said Business Objects agreed to pay an €86 million break-up fee if the deal does not go through under certain circumstances.
Analysts today predicted that the Business Objects acquisition would stimulate more consolidation among BI software vendors. Possible acquired companies include Cognos, predicted Ray Wang, an analyst at Forrester Research. Possible acquiring companies include IBM, Hewlett-Packard, and Oracle, he predicted.
Wang also said it is possible that one of those companies with an interest in acquiring a BI company may make a counteroffer for Business Objects.