After SAP-SuccessFactors Deal, the Cloud Is a Different Place
If you needed any further validation that the idea of running software not on a computer that you can touch but instead on one that’s probably in another time zone is catching on, then Saturday’s $3.4 billion acquisition of the cloud software firm SuccessFactors by the business software giant SAP is it.
The traditional narrative of cloud companies like SuccessFactors, NetSuite and Salesforce.com has looked a little like this: Scrappy cloud upstart aims to change the established way of doing things and paints a target on the established, big software company that controls the marketplace. Said upstart systematically goes after its customers, starting with the smaller ones. Big company pretends not to notice.
SAP has regularly been portrayed as the villain in that story. Talk to any vendor of cloud-based software that’s aimed at running some aspect of a business, and it doesn’t take long for the founders to start talking about SAP as the company whose business they would most like to disrupt.
The part of the story that hasn’t played out yet, but which appears to be starting, is that eventually the big companies do notice, and when they do, they start buying. SuccessFactors is the second acquisition of an enterprise cloud software company in as many months. The other was Oracle’s $1.4 billion deal for RightNow.
The first and most obvious thing that’s going to result from the SAP deal is that speculation will surge about another, similar deal. Already this morning, analysts at BMO Capital have upgraded Taleo, a SuccessFactors rival, on the theory that it is now in play and that Oracle is the most likely buyer. Taleo specializes in cloud-based talent management software, and is about the same size by revenue as SuccessFactors. Publicly traded since 2005, Taleo saw its shares close Friday at $32.96, within 13 percent of its historic high of $37.10, giving the company a market capitalization of about $1.4 billion and making it a relatively easy target for Oracle and its $32 billion war chest. BMO boosted its price target on Taleo shares to $40 from $28.
Another one to watch is Workday, yet another provider of cloud-based human resources software, which last month raised $85 million at an implied valuation of $2 billion as warm-up for an expected IPO next year. It’s on track to do about $320 million in billings in 2011, and is nearing profitability.
Another company that will probably be considered for takeout is NetSuite, the company that specializes in cloud-based software for running a business. Trading as of Friday at a valuation just shy of $3 billion, it could be a takeover target, too, though its business is humming along just fine. It’s on its way to closing the year with sales north of $235 million — much of that derives from taking customers away from SAP.
NetSuite CEO Zach Nelson said the SuccessFactors deal basically confirms that Netsuite’s approach has been the right one all along. “It’s far more beneficial for NetSuite than it is for SAP,” he told me by email over the weekend. “With this acquisition, SAP has told their customers that the path NetSuite pioneered a decade ago is the future, while the acquisition does little to advance their own product architecture.”
Which raises another question: What will this deal do for SAP? In the plus column, it makes SAP a share-gainer and not a share-loser in the $13 billion talent management software business, and improves its competitive stance against Oracle, says Brian Schwartz, an analyst with ThinkEquity, in a note to clients today.
In the negative column, SAP has spent about half of its cash — as of Sept. 30 it had €5 billion ($6.8 billion) in combined cash and short-term investments — to acquire a company that amounts to less than 4 percent of its revenue. SAP will have to struggle to get SuccessFactors to scale up to the point that it moves the needle. Even SAP co-CEO Bill McDermott concedes that it will take awhile, telling Bloomberg News that SuccessFactors could add €1 billion in incremental revenue — by 2015.