If you can’t make it, buy it.
Europe’s largest software maker, SAP, has been following this principle with the vigor of a late convert. The German company ditched its longstanding penchant for organic growth only a few years ago. Since then, it has been buying, spending about $9 billion on acquisitions, about 10 percent of its current market value, in the last 18 months.
So far, the deals have made strategic sense, mainly strengthening SAP’s market position in cloud computing. The prices are another matter. This week’s acquisition of Hybris, a privately held Swiss rival, confirms both patterns.
Hybris offers a new generation of customer relationship management software. It sells to industry leaders like Procter & Gamble, Nespresso and Levi’s. Hybris’s core strength is the ability to provide a similar customer experience on all distribution channels, from smartphones to Web sites.
The acquisition will cover up a hole in the SAP line. Parts of its existing C.R.M. software rank poorly with industry experts like Forrester Research and have been losing ground. According to research by the consulting firm Gartner, SAP lost the top position in C.R.M. to Salesforce.com. That matters in an $18 billion global market that grew by 12.5 percent last year.
SAP isn’t saying, but Reuters cites sources putting the price at $1 billion or more. That would be a sky-high valuation, at least 10 times annual revenue of about $110 million. Starmine data show the average sales multiple for listed software companies is 3.5. Just this week, I.B.M. and Salesforce.com bought cloud computing companies at sales multiples between 5 and 9.
SAP can point out that Hybris’s revenue nearly doubled in 2012 and that other bidders were interested. In any case, it must now integrate the acquisition and retain key staff members. SAP has not been particularly good at the latter, having lost the founders of Sybase and SuccessFactors, two recent acquisitions.
It looks as if SAP has shown something like hubris, overbearing arrogance, in the price it was willing to pay for Hybris. It will take something more like humility to make the deal work.
Olaf Storbeck is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
