FT : SAP Follows BO Deal With Sybase Stinker

Tuesday, May 18, 2010

Ever since SAP reported a 28% fall in annual software sales and dismissed chief executive Leo Apotheker earlier this year, it has been clear that the German software company was in need of a transformational change.  However, investors and industry observers were yesterday debating whether the $5.8bn acquisition of US peer Sybase was the right deal to achieve this.  The transaction – which comes just three months after Jim Hagemann Snabe and Bill McDermott took over as co-chief executives of SAP – is undoubtedly expensive.  It represents a 44 per cent premium, or $65 a share for a stock that has not been above $50 since the mid-1990s.  It is the second-largest deal SAP has done since buying Business Objects for $6.1bn in 2007.  That deal was criticised as overpriced, and this time it has paid an even higher multiple of expected sales.  In contrast, Oracle, SAP’s far more acquisitive rival, paid just a 30% premium when it bought Phase Forward, a healthcare software company, last month…..Some analysts see Sybase as a “dusty” and “broken” company, a distant fourth in the database market behind Oracle, IBM and Microsoft.  “SAP has made no secret of wanting to do a meaningful deal, but not many would have guessed it would be Sybase.  They need to strengthen their middle-ware offering, but instead they have bought a database vendor that competes in a market dominated by Oracle,” said Paul Guely, managing partner at Arma Partners, the technology advisory company.

SAP is thought to have considered a number of targets , including Tibco, the Nasdaq-listed company that provides “middleware,” or technology that connects applications.  Some analysts say this might have been a better deal.  SAP argues, however, that the Sybase acquisition gives it access to cutting edge technologies, particularly for mobile phones.  Sybase is a market leader in software for putting business applications onto mobile devices.  Its software operates 1.5bn messages daily, according to John Chen, chief executive.  “The immediate benefit is the mobile capability.  They will be able to take SAP applications and make them accessible on handsets.  Not many software companies have that capability and it will give SAP an incredible boost,” said Yvonne Genovese, analyst at Gartner.  “This deal will extend our applications and analytics to millions of mobile users,” said Mr McDermott, pointing to the fact that there are seven to eight times as many mobile devices as broadband connections globally.  Mobile access could be particularly important in emerging markets such as China, where Sybase has a strong position.  The deal will also help SAP to push forward its “in memory” technology, where data is stored on the memory chip instead of the hard drive, a system that allows much faster computing.  SAP says in-memory systems can cut the time it takes to analyse a database from hours to seconds.  It is considered the next big leap in computer technology.  Developing in-memory computing has been a pet project for Hasso Plattner, SAP’s chairman and cofounder, but the company is coming under pressure to turn the technology into marketable products.  Putting SAP’s in-memory technology in Sybase’s databases would help sell the concept, said Ms Genovese.  Sybase is focused on clients from the financial and trading world, where SAP believes the in-memory technology’s strength will play out best because of the size of data and the speed needed by the industry.  Going into the database business will increase the competition between Oracle and SAP, however.  Up to now, SAP has partnered with Oracle, IBM and Microsoft, using their databases as part of its enterprise systems.  However, the temptation will now be to offer the Sybase solutions instead, as part of a complete, in-house “stack” of software.  “The stack wars will start to happen, with Oracle, SAP, Microsoft and IBM all competing in this area,” Ms Genovese said.

Reference : The Financial Times, May 14th 2010.

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