SAP: Oracle Did Not Prompt Business Objects Swoop

by Brian White

SAP abruptly ended its policy of avoiding major acquisitions with a 4.8bn euros ($6.8bn) agreed bid for BI vendor Business Objects, and immediately faced a stock market hammering when Business Objects spoiled the party by issuing a profit warning.

The deal, which follows extensive stock market speculation, works out at 5.4 times Business Objects trailing revenue, much more expensive that the 4.3 times ratio that Oracle calculated was worth paying when its acquired corporate performance management software maker Hyperion Solutions for $3.3bn earlier this year.

With IBM and Hewlett-Packard also showing interest in the sector, the deal sparked speculation as to who would be the next takeover target. As a result Cognos shares rose 8.42% to $48.41 and Microstrategy rose 1.31% to $81.94. The one company not to benefit was SAP, which has always made a virtue of organic growth and has only made fill-in acquisitions.

Gloom in Europe was shared in the US where the companys shares opened 5.39% lower at $51.04. If another bidder makes a higher offer, SAP would be eligible for an 86m euros ($121.7m) break-up fee.

Business Objects has just had a tough third quarter and expects revenue to rise 18% to a range of $366m to $370m, compared with its forecast in July of $382m to $397m. The problem was license revenue of $137m to $139m, which is likely to lead to earnings per share in the range $0.04 to $0.06, compared with a forecast of $0.16 to $0.20. Business Objects originally expected revenue this year to rise 21% to between $1.52bn and $1.53bn.

SAP CEO Henning Kagermann said the acquisition was in keeping with its stated strategy announced in 2005, to double its addressable market by 2010. He said the deal would accelerate its growth in the business user segment.

However, there are suggestions that SAP has been spooked by Oracles aggressive acquisition strategy. It's not a reaction because we can't see that Oracle is gaining market share," said Kagermann.

Paris, France-based Business Objects are long been the subject of takeover speculation and last month French newspaper Le Figaro said it had appointed Goldman Sachs to find a suitable buyer, with SAP among five companies said to be tempted. This was denied by its CEO John Schwarz. With the BI market worth $10bn a year and growing at 10% annually, he said it had been expanding by 50% greater than the market as a whole.

Business Objects will continue as a separate organization with SAP, with its applications both tightly integrated with SAPs platforms and, as at present, non-SAP environments.

The two companies hope to offer business intelligence software along with embedded analytics in transactional applications. SAP has 41,200 customers compared with 44,000 for Business Objects and with 40% in common, they both see big cross-selling opportunities.

Schwarz was also enthusiastic about the future of software-as-a-service and increased penetration to their combined channel partners of the under-exploited SME market.

What caused SAPs share price to fall was the company's admission that due to acquisition-related one-time effects, it expects the transaction to be dilutive by mid-single digits euro cents to SAP's 2008 earnings per share. However, it said it expects it to be accretive to earnings in 2009 and beyond. The transaction is expected to close in the first quarter of 2008.

When the transaction is complete, John Schwarz will continue as the CEO of Business Objects and is expected to become a member of the SAP executive board.