I was in a plane somewhere over Europe when the news broke that SAP plans to acquire Ariba for $4.3 billion. It answers a couple of nagging questions coming out of SAPPHIRE Now but poses many more.
SAPPHIRE Now was an odd event by SAP standards. There were no real product announcements other than the HANA free license topic. That's highly unusual for SAP. It normally uses these events to talk futures. Instead, the event was given over to an emphasis on customers. SAP could likely have closed out SAPPHIRE Now by making the Ariba announcement but then I suspect internally, the company would have found it too distracting to change course from what was already a well planned event. Anyone who thinks it's easy to toss SAP co-founder Hasso Plattner off stage in favor of an acquisition announcement had better think again.
Regardless, the pending nature of the deal explains why there was very little apparent concern or kickback by board members to mine and colleagues' probing on the rationale behind what we see/saw as an undifferentiated cloud play. To the question 'what the heck's going on?' We now have a partial answer. At least for the moment. But nothing in SAP land is as simple as it seems.
On the analyst call I caught via replay, there was no sign of Lars Dalgaard in the commentary box. Given SAP is positioning this acquisition as primarily a cloud play, one wonders about the rationale behind his exclusion from the glad handing that usually peppers these events. This is especially so given that:
- SAP has made abundantly clear that Dalgaard is the sole go-to person for cloud topics and...
- the procurement leg of the SAP cloud story appears to have been answered through this acquisition and
- it provides SAP with a cogent answer as to how it reaches €2 billion in cloud revenues by 2015 although as we will see, that's not the whole story either.
Larry Dignan observes that:
SAP’s grand cloud acquisition rhymes with what Oracle did in on-premise software. Oracle acquired multiple enterprise software players. Oracle is trying to do the same with cloud computing, but seems a bit out of step. SAP buys SuccessFactors and Oracle acquires Taleo. Oracle also bought RightNow.
Aaaah - but this ain't over yet. Ariba shares customers with many SAP rivals including Oracle. There is nothing to say that Oracle would not enter a bidding war for an asset SAP clearly prizes.
From limited information, I have heard that the proposed deal is already impacting Oracle. The problem here is that Oracle is a mere eight days away from its financial year end close. While any negotiations on larger deals might well be over for Oracle customers, Oracle management will want to be focused on inking those contracts so that it can wow The Street.From that perspective, the timing is perfect for SAP and lousy for Oracle.
On the flipside, Oracle has a good track record of generally not over paying for acquired assets. The market has responded to the SAP bid by pumping the Ariba price a fraction off the 20% premium on the table for stockholders today. That suggests market makers currently believe SAP's $4.3 billion is the right price.
There is little downside for Oracle stepping on SAP's toes in this deal. It can not only outbid SAP very easily, it can offer Ariba stockholders an all cash bid without requiring loans, something SAP is having to fund through a term loan deal. It helps preserve Oracle's position as an Ariba partner while keeping the company out of the clutches of a deadly rival. The potential issues are more problematic for SAP if this deal turns sour.
I cannot imagine SAP being well equipped to win a bidding war. On the other hand, I can see Oracle calculating that it can force SAP to pay more than what some think is already a hefty premium on revenue. How high would SAP go in such a war? Some clue may come from SAP co-CEO Bill McDermott believing that Ariba will show revenue increase of 50% in 2012 with the acquisition being accretive to earnings in 2013 and able to top out $2 billion on its own by 2015. Those are very aggressive numbers.
Jason Busch has a similar take but is more cautious:
It's not over until it's over. A probability exists of another bid/offer to come in for Ariba. This is just the type of shenanigans that Oracle likes to pride itself on (although valuations approaching 10X on an EV basis are something the Oracle corporate development team would have a cow swallowing -- especially considering that Larry Ellison once referred to Ariba as a "feature of a feature," or something to that effect)
Jason is the go-to guy on procurement topics but then who knows? Oracle has been playing a knock off game with SAP the last half year or so and it would not surprise me to hear Oracle making a pre-emptive strike or cozying up to one of SAP's now shunned partners.
The overlaps to which Jason refers also present problems for SAP. Where will it draw the line between selling its own solutions and those of Ariba? More to the point:
...make no mistake: the transaction is every bit as important in getting Ariba users and Ariba prospects continuing to use Ariba modules, because that's what drives network volume
Where does Ariba fit into SAP's cloud play and who will end up running it? We have an answer to the first part as it relates to existing stated strategy. We don't have a clear answer to the second part. SAP has said that Robert Calderoni, Ariba CEO joins SAP's newly formed global management board rather than the executive board. That means when his lock up period is over, he can quietly slip out the back door. But it still leaves the question open - does Ariba join the Dalgaard group or co-CEO Jim Snabe's?
I'm thinking SAP is betting both ways. Keeping Ariba out of Dalgaard's orbit makes sense for what will be a sensitive time for customers who can easily switch to rival offerings if they feel SAP might not make such a good custodian of Ariba assets. This also keeps Dalgaard free to concentrate on delivering to his lofty promises, conveniently leaked on May 15th but only now getting attention. There is another more subtle and important benefit in operating this way. From Vinnie Mirchandani:
Ariba is one of the few enterprise companies born over 5 years ago which has made a painful transition to the SaaS business model.
That's the big one for me. In our meeting with Dalgaard, I was struck by the fact he seemed to have had little or no time for getting to grips with SAP culture or its history. Given that his unit is ring fenced for all practical purposes, that doesn't matter today. But it matters in the coming days as SAP as a whole company figures out how to traverse the old and new. Calderoni's three year experience will be invaluable to a management that has started to recognise it cannot continue on a course that has all the features of an 'ignore everybody' approach to the market though sometimes for all the wrong reasons.
The last thing SAP's current leadership wants is to deliver on what it has promised the market by 2015 but leave behind a crippled company that didn't transition when it had the opportunity. Its customers will not stand for that. Ariba, SuccessFactors and one more mega deal (wherever that comes from) will provide that opportunity.
Finally, it does not go un-noticed that this acquisition, just like that of SuccessFactors, is being consummated in the US. The significance of that should not be under estimated as SAP makes one more attempt to wrest itself from the restrictions that operating out of Germany present. Employees in that territory may be miffed to see even more attention going to the US but quite frankly they will have to get on with it.