SAP is Finally Paying for Growth – But Is It the Right Deal?
As Oracle dashed around snapping up companies, SAP remained an aloof spectator. CEO Henning Kagermann insisted they would hold on to their number one spot in the business software market by growing organically. Today that policy has changed, and Kagermann is now chasing customers through acquisition.
The initial market response is one of skepticism. SAP's share price fell at the Monday morning open as investors decided the 20% premium to Friday's closing price was too rich. The deal is to be funded with a combination of borrowings and retained profit and therein lies another dilemma for shareholders. Will SAP get the money at a reasonable price, given the tightness of credit markets? Analysts are also downbeat, suggesting the deal is not imaginative, and only comes after the ‘good companies’ were bought at better prices.
However, strategically, the acquisition moves SAP sideways into a market that is growing more quickly than its core business software market. Business intelligence software – which helps companies mine data to detect market trends – is expected to grow at 11% a year until 2010. It also pushes SAP a step further into the market for software on demand over the web. This is another growth area, which offers the opportunity for SME's to outsource software functions and removes the need for them to manage their own software infrastructure.
The challenge is for SAP to steer the takeover intelligently. So far Kagermann has said the right things: that restructuring will be handled carefully and that there will be room for stand-alone products as well as integrated software. He has so far remained light on potential infrastructure synergies, but further news on this front could help address some of the concerns that the deal is 'backward looking'.
'Markets are celebrating: Mr Bernanke has put some alcohol back into the punch bowl.' That is how Lex Werkheim, fund manager at Spirit Aim described the ebullient behavior of equities this morning. Clearly Friday's jobs data, whilst better than expected, was not sufficiently strong to kill off expectations of further fed rate cuts. He then went on to express concern that there is plenty of hope built into these prices about the end of the credit market squeeze that has dogged financials. Quite – but it is hard to stand on the sidelines while many markets are now booking lifetime highs.
Guest Host Andrew Milligan from Standard Life revealed they are now re-rating Japan, from 'Neutral' to 'Heavy'. The positives of corporate restructuring are not fully priced in to the market yet, he says. Europe remains the main bet, with the latest re-weighting seeing European equities moved from 'Heavy' to 'Very Heavy'.
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