SAP's cloud buy raises bubble fears

Did SAP pay too much for SuccessFactors?

SAP's US$3.4 billion takeover of human resources vendor SuccessFactors has been viewed by analysts as an expensive price of being late to the cloud computing game.

The German vendor, which has dragged its heels on offering its business software using the software-as-a-service model, moved on the weekend to acquire U.S. web-based services company SuccessFactors for an agreed $40 per share, a 52 percent premium.

The deal helps SAP catch up with rivals in cloud computing, a fast-growing field where data and processes are hosted remotely on the Web. As part of the transaction, SuccessFactors founder and chief executive Lars Dalgaard will join SAP's executive board and will run its cloud business.

DZ Bank analyst Oliver Finger considers SuccessFactors "a very good strategic fit for SAP in the cloud sector", but the market's response has not been quite as positive.

"This marks implicit recognition by SAP that their cloud strategy is not working," said Evolution Securities analyst Roger Phillips.

SAP shares were down 1.7 percent dropped on Monday, while Germany's blue-chip DAX index was up 1.2 percent. SuccessFactors shares climbed 51 percent to $US39.70, nearly hitting SAP's US$40 offer price.

Analysts had previously warned that SAP risked losing ground to Oracle in the field of cloud-computing. However, there are not many assets in the business available for SAP to buy.

Salesforce.com was seen as too big to acquire, rival Oracle bought RightNow Technologies in October, and NetSuite is majority owned by Oracle CEO Larry Ellison.

"In fact, it is not clear who is next in line behind SuccessFactors. For this reason, despite the apparently rich price tag, we would not rule out the risk of a counter bid," said WestLb analyst Jonathan Crozier.

Heino Ruland, an analyst at Ruland Research, said he sees the acquisition as being way too expensive and said the race for cloud-computing technology was heating up to the point where it seemed market players were spending irrationally just to stay in the game, mirroring the dotcom bubble more than a decade ago.

The price SAP is paying for SuccessFactors represents about eight times forecast 2012 revenues, analysts said, compared with the multiple of about 5.5 that Oracle paid for RightNow.

"The valuation of this deal is high, but reasonable in our opinion, in light of the high-growth, strategic asset that is being acquired," said Nomura analyst Rick Sherlund.

SAP now says it aims to become the world's No. 1 cloud business and plans to get there without more major acquisitions.

"We're going to remain an organic growth company primarily, but where there is an opportunity, a crown jewel in the market like SuccessFactors, and where it can help us become the cloud powerhouse we want to be, you make the move," co-CEO Bill McDermott said on a conference call with analysts and journalists.

SuccessFactors' operating margin jumped to nine percent in the third quarter from zero a year earlier, and the company said it could not hire quickly enough to meet demand.

SAP raised its sales outlook on the deal, saying its revenue could easily reach 21 billion euros by 2015, about a billion euros more than expected. Its 2012 earnings will be hurt by the purchase, but there will be a positive impact from 2013 on.

SuccessFactors, which first went public at US$10 a share four years ago, makes human resources software used by companies to review employee performance.

Shares of Taleo, SuccessFactors' closest rival in the business of offering human resources software over the web, soared 19 percent in Nasdaq trade. The company's chairman and CEO Mike Gregoire noted that the acquisition "reaffirms" the market for cloud-based talent management software, and "takes SuccessFactors out of the competitive equation as a talent management focused player, and leaves Taleo as the only stand-alone SaaS talent management vendor of scale."

JPMorgan Chase advised SAP on the deal, while Morgan Stanley advised SuccessFactors.

(Additional reporting by Brett Winterford in Sydney, Jim Finkle in Boston).