What should SAP do with its $5bn war chest?

A number of recent conversations with the financial analyst community about the ongoing tussle between Oracle and SAP have proved extremely interesting. There is speculation whether SAP will hit the numbers it has internally set itself for Q2 although nothing I hear or see suggests the company has been blown off course any more than it already has been. The old 'will they get acquired and if so by whom?' discussion has also reared its head. I personally discount that as entertaining chatter if for no other reason than Leo Apotheker, the recently minted CEO has been making bullish noises about having an estimated $5 billion acquisition war chest to hand. That was emphasized in the telling quote from the Wall Street Journal:

Apotheker says that while he and his predecessor have similar visions for SAP, there is one big difference between them. “Henning has an infinite amount of patience,” he says. “I do not.”

As a bit of additional background. Analysts are concerned that SAP's swerve towards on-demand services will provide less visibility into revenue trajectories so would prefer to see SAP acquire into traditional if lumpy sales opportunities. I understand why they think that but in truth they're living in a fool's paradise. It may be some years before saas cements its place in the enterprise space but there is too much disruption out there for it to be ignored. This is a topic for another day but it's enough for now to know that analysts are thinking about the issues and favoring an acquisition led growth strategy.

Apotheker has reason to be impatient. The company is faced with numerous challenges, not least a sense that it overpaid for BusinessObjects, the division that's getting the most visibility coupled with a snail's pace delivery of anything fundamentally new or interesting to catch buyers' attention. In turn that raises the question - what will the company buy?

The other week it was rumored that SAP was about to make a big acquisition but none came except the 'tuck in' announcement of the intention to buy carbon management company Clear Standards. I'm not going to get excited about that. Terms were not announced which tells me it's a petty cash deal. That just goes to show how much the rumor mill can get it wrong.

The acquisition problem facing SAP comes in several parts. Over the years I've watched as it has partnered with tech companies, paid to gain access to code and then decided 'Ah - we can build that' only to walk away from those partnerships. The net result is the way SAP does the math, it doesn't often get a sniff at the juicy companies that might otherwise make a decent fit. It tends to undervalue when it might be in a competitive environment. I'm sensing that Apotheker is in no mood to work that way. He has a lot to prove and little time in which to do it.

If Apotheker goes on an acquisition binge, he will need to be ultra careful. SAP remains an engineering company first and foremost. Despite the apparent control he has as CEO, SAP is run by committee collegiate style, with powerful voices from the engineering dominated Walldorf to consider. Any technical acquisition is bound to be put under the microscope and face resistance from the Not-Invented-Here crowd.

Oracle has done a superb job rolling up much of the industry leaving very little of what one might call Tier One candidates lying around. If SAP starts making Tier Two acquisitions then eyebrows will be raised.

Larry Ellison's hire of Charles Phillips was a masterstroke that has allowed Phillips to write history the way he predicted when working as an analyst at Morgan Stanley. But that's easy when your master hands you a blank check and says 'Go get 'em.' Even so and despite Oracle being half SAP's size in the apps business, this is the company the analysts currently favor. They believe Oracle's long term strategy is superior. I disagree but again, that's a separate discussion.

Oracle's 58 company acquisition run limits SAP's ability to find prime meat upon which it can feast. There are a few exceptions. The names that turn up consistently are TIBCO, SoftwareAG and OpenText. Other names appear but these are relatively minor and mostly address functional holes SAP has to backfill.

If you look at today's market valuation for each of these companies, SAP could gobble all three and just about see change for its $5bn but of course life is never quite that simple. Taking each company in turn:

TIBCO's middleware: a juicy prize?

SAP and TIBCO had a partnership at one time that was junked for WebMethods, now owned by SoftwareAG. I've always felt that SAP missed a trick by not deepening that relationship, largely because I see many cases where SAP and TIBCO are inside the same companies, especially in telco, utilities and oil/gas. So why might this work?

• It strengthens the integration story.
• It allows SAP to more easily pull in many third party add-ons and so add weight to the online ecosystem story.
• Improves SAP's competitive position against IBM, TIBCO's nemesis though that might come with a sting in the tail as IBM is both a customer and partner with SAP.
• Provides a more solid entree to the financial services industry markets which are becoming prime candidates for off the shelf software while retaining much DIY software.
• Gives impetus to SAP's SOA story which at best sounds dull but which TIBCO has crafted well for engineering architect.
• Puts TIBCO out of its misery as 'last man standing' of any substance in the integration space.

It's said that SAP took a sniff but decided to pass. We'll see but in a recent conversation with senior TIBCO management, it was said the company feels comfortable about remaining an independent player. Despite past history, the fit is good if for no other reason than both companies are deeply engineering led.

SoftwareAG, an interesting alternative

Once again we're talking about a company that brings engineering benefits to the table but why might SAP try and nab SAG when TIBCO potentially offers a superior alternative?

• Software AG is in SAP's back yard and would be more culturally acceptable to the Gnomes of Walldorf;
• Both companies share customers. SoftwareAG goes to market on its ability to use WebMethods as a fast track ESB integration tool for SAP implementations, something that SAP could usefully exploit.
• SoftwareAG operates in industries that are directly complementary to SAP verticals and adds a few more where SAP is not so strong like healthcare and education.
• SoftwareAG's banking solutions would take SAP into the heart of payments processing, in itself a huge global industry that has not been well served by package apps vendors. Again, it's an opportunity.
• It's a relatively 'safe' bet' for business integrators.

OpenText: out with the old and in with the old:

I've not been a huge fan of OpenText the last few years. They're the classical ECM company. It developed software that ties companies down under a welter of command and control options that has been reflected by the management style. That may appeal to information sensitive CXOs but doesn't play so well in the modern, fluid, collaborative environment some of my Enterprise 2.0 friends promote. To its credit, OpenText has recently stepped from behind the shadows and is now offering social computing tools. So why might this marriage work?

• SAP is all about providing a set of business processes you implement and then concrete over in the hope you never have to touch them again. We know that's not true but 'trust' is a big part of SAP's schtik. The same goes for OpenText os from a go to market perspective, the two are very much on the same hymn sheet.
• OpenText provides SAP with another applications revenue stream in the same way that BusinessObjects has done. That means SAP would have a broader base with which to go to market.
• OpenText's product portfolio is sufficiently broad and deep to allow for many alternative sales opportunities, always a good thing in a difficult market.
• It's recent social computing 'conversion' dovetails nicely to some of the things SAP itself wants to do in that space. This could potentially pave the way for SAP to credibly open up data stores and mash them up with its own transactional data to provide a richer context for companies jumping on the collaboration train.

Which would you put your money on? Any? None? Or something from left field the financial analysts are missing? Or is this all just idle chatter fueled by a few stray remarks from the new CEO on an otherwise slow news day?

All I can say is that the frequency of calls I am receiving tied to the frequency of the same names cropping up (most recently twice in one day) suggests the analysts are sniffing the air and catching a scent they wish to follow.