Just three months after SAP acquired SuccessFactors, a cloud leader for human capital management solutions, for $3.4 billion, it has now announced the acquisition of Ariba, a cloud leader for eProcurement solutions, for another $4.3 billion. Now, $7.7 billion is a lot of money to spend in a short amount of time on two companies that hardly make any profit. But it’s all for the cloud, which means it’s for the future business opportunity in cloud computing services. So far, so good; SAP has invested and acquired quite a number of cloud companies over the past years: Frictionless, Clear Standards, Crossgate, etc. The difference in this most recent acquisition is the big overlap with existing solutions and internal R&D.
Following the first wave of cloud acquisitions, SAP was sitting amid a zoo of cloud solutions, all based on different platforms: ePurchasing, CRM-OnDemand, BI-OnDemand, Carbon Impact, ByDesign, Streamwork . . . They all used very different technology, resulting in big integration and scale challenges behind the scenes. The market welcomed with open arms SAP’s announcement 1.5 years ago that it would consolidate its cloud strategy on the new NetWeaver platform for both ABAP- and Java-based cloud solutions.
The big news in the ePurchasing software market yesterday was SAP’s acquisition of Ariba. This blockbuster deal will extend SAP’s position as the largest software vendor in the ePurchasing market. It also brings into the SAP fold one of the most innovative companies in this market – a company that has a fair claim to having begun the whole market in the late 1990s.
Still, as my title suggests, I’m not convinced that this acquisition makes strategic sense. I think there’s a real risk that this turns out to be a deal where one plus one equals 1.75, not two, let alone a multiple of two. Reason one: the tremendous duplication of products between the two firms, and thus the problems of product rationalization and internal competition. Reason two: the Ariba Network, which is the main rationale for the acquisition, is based on an idiosyncratic pricing model that in my view is unsustainable at current rates and thus will not generate the kinds of revenues that SAP is expecting.
Let me first state the case for why this could be a good deal:
SAP has a goal of significantly increasing the portion of its revenues that come from SaaS subscriptions, so adding a projected $342 million in subscriptions revenues in 2012 (on an annual basis – SAP’s share for the year will be about half that) helps SAP reach its target of $2 billion in SaaS revenues.
Ariba has correctly recognized the economic value in operating a supplier network that stands between corporate buyers and suppliers and facilitates their transactions. SAP’s acquisition of Ariba now gives it control of and revenues from the largest of these supplier networks.