991RA SAP Announces Plans to Acquire SuccessFactors

What is Happening? On Saturday, December 3, 2011, SAP announced that it had entered into a definitive agreement to acquire SuccessFactors for $3.4 billion, a roughly 10X multiple to estimated calendar year 2011 revenues (and 8X estimated 2012 revenues). The acquisition is expected to be completed in 1Q2012, with the San Mateo, CA-based SuccessFactors to remain a separate entity, renamed “SuccessFactors, an SAP company.” Lars Dalgaard, the founder and CEO of SuccessFactors, will remain in charge at SuccessFactors, as well as taking on a broader role in leading SAP’s Cloud business.

Overall, this is a positive move for SAP customers, as the acquisition immediately makes SAP a leader in Cloud business solutions – with strong synergies in terms of target (large-enterprise) customer footprint. We view this acquisition not only as a means to give serious heft to SAPs Cloud intensions and plans, but to provide it with an infusion of fertile and experienced Cloud DNA, as well as leadership who truly understand what it means to be in a services business. No doubt, SAPs modest success to date in its Cloud business contributed to this move – as SAP is not alone among traditional ISVs, many of whom have been challenged to robustly transition their business, technology and operational models and culture to the Cloud.

On balance we think this will prove to be a smart acquisition that is yet another marker in the mainstreaming of the Cloud. Ultimately, we believe the success of this acquisition should be measured by whether it truly helps SAP transition beyond its strong product-centric culture – as it positions itself for success in a rapidly changing market.

Why is it Happening? Instant Cloud Credibility and Significant Cross-Sell Opportunities. SuccessFactors brings SAP instant credibility as a serious, enterprise-class Cloud provider. While SAP has certainly enjoyed some success selling its LOB On Demand solutions (e.g., Sourcing, Sales, Carbon/Energy Mgmt) to large-enterprise clients, and its ByDesign application suite to SMB customers (and as part of a 2-tier application architecture for larger R/3 installations) – SuccessFactors immediately brings 3,500 customers and 15 million subscribers to the mix.

The SuccessFactors acquisition provides for significant cross-sell opportunities given SAP’s large-enterprise, on-premises footprint that currently includes more than 500 million employees within SAP customer enterprises – including up-selling to the 15,000 HCM deployments that SAP currently maintains. With HCM as the 2^nd most popular “core” business application (after CRM) leading large enterprises into the Cloud, this acquisition will clearly position SAP to not only stem future defections (such as what happened when Siemens went to SuccessFactors in the first place), but to position it for significant upside opportunity in this important application sector. By SAPs own estimates, 80 percent of all new HCM deployments will be Cloud-based by 2015.

SuccessFactors had in recent years attempted to broaden its Cloud Business solutions portfolio beyond its Talent and performance management roots. In 2010, the SuccessFactors acquired Inform Business Impact a provider of business analytics and workforce planning software, Software A/S (YouCalc), a provider of real-time analytics and reporting software, and CubeTree, Inc., a provider of social media and collaboration software – and most recently, Plateau Systems, a provider of on-premise and Cloud HR solutions. However, the fruit of these acquisitions are still on the tree, as SuccessFactors remains known primarily as a Cloud HCM company, despite attempting to reposition itself as a provider of tools for analytics, business success metrics, social media and collaboration.

Market Impact While both companies have a significant number of small and mid-range customers, both are squarely large-enterprise focused, and in the short-run, SuccessFactors can easily fit into SAP’s LOB On Demand product mix as its heavy-weight HCM Cloud solution. While the analyst call that Saugatuck participated in on Saturday afternoon largely finesse. . . .CLICK HERE TO READ THE FULL RESEARCH ALERT

Mr. McNee is the President and CEO of Saugatuck Technology, a subscription research and advisory firm focused on emerging industry trends and disruptive technologies driving change in enterprise IT. Over the past few years, Mr. McNee has helped spearhead the firm's research into evolving business models as a result of the shift to software-as-a-service (SaaS) and Cloud Computing. More recently, he has been actively involved in launching the firm’s CIO-targeted Cloud migration / leadership practice.

Prior to founding the firm in 1999, Mr. McNee spent eleven years with Gartner, Inc., most recently as Group Vice President and Research Fellow, responsible for guiding the firm's overall research strategy. A recognized expert in enterprise software and related business / IT services, Mr. McNee spent five years leading Gartner's Business / IT Management practice as its Director of Research, focusing on CIO governance, IT sourcing models and e-commerce management strategies. Prior to this role, he was a lead analyst focusing on enterprise business applications, and asset management strategies. Prior to Gartner, Mr. McNee held strategic planning, financial management and marketing positions at CBS, HBO, Comshare and the Institute for Social Research.

A frequent speaker at industry conferences, Mr. McNee has published hundreds of articles and consulted with thousands of business and IT executives, and vendor clients around the globe.

Mr. McNee is a University of Michigan alumnus, and has completed graduate work in economics at New York University. Since 2001, he has been a Board or Advisory Board member for the Westport Public Library.

Follow Mr. McNee on Twitter at @billmcnee.

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