Sunday, February 14, 2010

Will SAP be acquired?

Lately, SAP has had management shake-up followed by management shake-up followed by management shake-up. SAP's challenges have led many to speculate whether SAP can remain independent. In that vein, Enterprise Irregulars ran a poll asking readers to state their opinions of whether SAP will be acquired, by whom, and when. The poll will remain open, but the results at this point are not changing quickly with new votes, so this is as good a time as any to assess the results.

With over 340 nearly 600 votes in, two thirds over 70% of all who voted expressed the opinion that SAP will be acquired.

Poll 1 (343 votes as of 14 Feb 2010) (594 votes as of 22 Feb 2010)
Who will acquire SAP?

No one, SAP will remain independent: 34% (116 votes) 29% (170 votes)
AT&T: 1% (4 votes) 1% (6 votes)
Cisco: 2% (6 votes) 2% (13 votes)
Google: 3% (9 votes) 2% (12 votes)
HP: 7% (24 votes) 7% (39 votes)
IBM: 29% (99 votes) 34% (200 votes)
Microsoft: 18% (61 votes) 18% (104 votes)
Oracle: 4% (12 votes) 6% (36 votes) 1% (3 votes) 1% (5 votes)
Other: 3% (9 votes) 2% (9 votes)
Poll 2 (275 votes as of 14 Feb 2010) (485 votes as of 22 Feb 2010)
When will SAP be acquired?

Not for the foreseeable future. SAP will remain independent: 41% (112 votes) 33% (159 votes)
Announcement in first half of 2010: 6% (17 votes) 6% (31 votes)
Announcement in second half of 2010: 20% (55 votes) 25% (119 votes)
1H2011: 10% (27 votes) 12% (59 votes)
2H2011: 8% (23 votes) 9% (42 votes)
2012: 10% (28 votes) 10% (49 votes)
2013: 1% (4 votes) 2% (12 votes)
2014 or later: 3% (9 votes) 3% (14 votes)
Analysis of poll results

Clearly, an overwhelming majority of respondents believes that SAP will be acquired (not everyone voted in the second poll). 225 of 341 (66%, or just a shade under 2/3, of) Over 70% of respondents indicated a belief that SAP will be acquired. IBM was the leading contender, with 29% 34% of respondents, followed by Microsoft with 18%, and HP with 7%. Of those expressing an opinion as to when SAP will be acquired, 10% believe it will be announced in the first half of 2010, 34% 37% go with the second half of this year, and 17% 31% believe it will be next year.

Can SAP be acquired?

Obviously, SAP can be acquired. It is for sale every day on multiple stock exchanges. The founders might have to be negotiated separately, but, yes, the company could be acquired - theoretically.

In practicality, there are a large number of issues that would make an acquisition of SAP very challenging.
  • The founders own a controlling share of the company. Their support would be essential for any acquirer. At the moment, the founders do not seem to have an interest in the company being acquired, but this can change. The founders might like to be the largest shareholders in IBM (for example) some day - or (to put it indelicately), their heirs might.
  • The remaining shareholders have to approve an acquisition with a large majority. This could happen only if they expected that the company's management would provide a significantly worse return on their equity than would an acquirer. This is not so hard to imagine, particularly if the latest management shake-up fails to produce a return better than the market as a whole, and if a suitor would propose an acquisition with a significant premium.
  • Projected customer retention would have to justify the purchase price. Given how hard it is to move off SAP, and given the current difficulties with third-party support models, this criterion seems to be easily satisfied, at the right price for the company.
  • European and national regulators (e.g., in the US, Russia, and China) would have to be satisfied that the acquisition of the company would not decrease competition in the market. This criterion would be satisfied if the acquirer were not a major applications supplier prior to the merger, and particularly if Oracle were surging or SAP were showing signs of an impending collapse. Passing this hurdle would be tricky, although AT&T, Cisco, Wipro, or others should be able to overcome this; Oracle and Microsoft would have significant challenges based on their applications portfolio (although they could divest), and IBM and HP might have smaller challenges based on their size and control of the enterprise market in various segments.
  • The most challenging issues could be with national labor laws, particularly in Germany. These labor laws restrict the types of changes that can be made by the company without approval from the workers, such as reductions in force, changes to compensation levels or structures, and changes in management and reporting structures. Any acquisition of SAP will require approval from the German workers, and this may be difficult to obtain, particularly if the founders give up their standing by offering to sell their shares to a foreign company.
Summary, and my €0.02

Given all these issues, an acquisition of SAP is very unlikely in the short term, and perhaps could not occur unless SAP faces an existential crisis. Many would argue that such a crisis is looming, as evidenced for example by the results of the poll above. Time will tell. Regardless, I would advise employees of SAP to focus on overcoming the company's short-term challenges, and exploiting the opportunities within its grasp.

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