SAP Co-CEO McDermott: SuccessFactors Acquisition Adds Cloud 'DNA'

SAP executives are touting the company's planned $3.4-billion acquisition of SuccessFactors, a developer of on-demand human capital management applications, as a major step forward in SAP's efforts to compete in the cloud-computing arena.

"This is a strategic move for SAP, for SuccessFactors, and for our customers and for the entire cloud," said co-CEO Bill McDermott in a conference call Monday. "The cloud is a key pillar of SAP's growth strategy. This move will significantly accelerate the momentum we already have as a provider of cloud applications, platforms and infrastructure."

Best known for its enterprise-class ERP applications, SAP was a relative latecomer to the cloud before making its Business ByDesign cloud application suite generally available in July 2010.

"This acquisition is clearly meant to plug the obvious holes in SAP's previously weak cloud strategy," said a report from financial investment firm Morgan Keegan. The deal "also effectively creates a more credible defense against Oracle and its recently announced public cloud initiative, and also could be meant to stem customer losses against a surging Workday."

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SAP said Saturday that it signed a definitive agreement with publicly held SuccessFactors to pay $40 per share in cash for all of its outstanding stock, putting the total purchase price at $3.4 billion.

The SuccessFactors' board of directors has approved the deal, which the two companies expect to complete in the first quarter of 2012, pending approval from relevant regulatory authorities. The acquisition is being carried out by SAP America Inc., the Waldorf, Germany-based company's U.S. subsidiary.

The Morgan Keegan report called the acquisition "a surprising move by SAP to acquire what we view as one of the best-positioned cloud software vendors in the world today."

Once the acquisition is complete San Mateo, Calif.-based SuccessFactors and its 1,450 employees will continue to operate as an independent subsidiary, SAP said. SuccessFactors CEO Lars Dalgaard will remain in that post and also will take on the job of leading SAP's cloud business.

Next: Is SAP Overpaying For SuccessFactors?

McDermott, on the conference call, said the acquisition "gives us the number-one human capital management solution in the cloud. With the addition of SuccessFactors to our portfolio, we will gain immediate strength and leadership presence in the fast-growing segment of cloud-based applications for people and talent management."

SuccessFactors develops and sells a broad range of human resource management applications for workforce planning, recruiting, employee career and development, compensation management, employee training, and employee performance management and reviews.

SAP already offers human resource management applications in each of its application suites, including within the Business ByDesign suite. But while SAP described SuccessFactors' applications as "highly complementary" to SAP's core HCM software, it's unclear just how SuccessFactors and its core Employee Central platform will be integrated or positioned with SAP's applications.

SuccessFactors has more than 3,500 customers with some 15 million subscribers for its multi-tenant, cloud-based applications. SAP customers make up only 14 percent of SuccessFactors' customer base and McDermott painted that as an opportunity for the Waldorf, Germany-based company.

Beyond any gains brought by SuccessFactor's HR management applications, McDermott said SAP also would benefit from the company's cloud expertise.

"They truly understand the go-to-market dynamics in the fast-evolving cloud space and are one of the fastest growing cloud companies, based on 10 years of on-demand expertise," McDermott said. As an example, he said Successfactors has lots of experience with large-scale deployments of cloud applications.

"We'll take the DNA from SuccessFactors and bring that to the SAP cloud. The combination of SuccessFactors and SAP will, in fact, create a cloud powerhouse," the co-CEO said.

There also have been questions about the price SAP is paying for SuccessFactors. SAP said the offered share price represented a 52-percent premium over the stock's Dec. 2 closing price. Noting that the acquisition price is more than eight times SuccessFactors' expected 2012 sales, the Morgan Keegan report called the $3.4-billion price "one of the largest multiples paid for a market-leading cloud software vendor, to date." That, according to the report, could set "a significant precedent" for future acquisitions of subscription software vendors.

McDermott, on his call, said SuccessFactors is forecast to reach $400 million in sales in 2012. The company reported 77 percent year-over-year growth for its recently completed third quarter and 59 percent growth for the first nine months of 2011.