SAP Seals Business Objects Deal

On news of the acquisition, Deputy CEO Apotheker says it's an "exciting time" for the tech industry, despite economic fears and sagging share prices

by Jennifer L. Schenker

A weak dollar, a looming U.S. recession, and a sagging stock market may foreshadow a gloomy new year for the tech sector, but don't try telling that to German software maker SAP (SAP). "This is the most exciting time ever to be in information technology—at least in software," says SAP Deputy Chief Executive Léo Apotheker, who was in Silicon Valley on Jan. 16 to announce the successful conclusion of the company's $6.8 billion acquisition of French business intelligence software maker Business Objects (BOBJ).

Apotheker claims a U.S. recession won't change that. "Our core business is growing at a fast pace and is actually generating higher and higher margins, and there is no reason why it won't do the same in the future," he says. "All regions are growing in the double digits, and that gives us the confidence that we can weather storms here and there."

Rocky Share Price, Double-Digit Growth

Despite such bullishness, SAP's share price has taken a hit. It closed at €33.44 ($49.72) in Frankfurt trading on Jan. 16, up 1.8% for the day, but it's still down 20% from its 52-week high of €42.08 set last September, before the company announced plans to acquire Business Objects (BusinessWeek.com, 10/8/07).

By all rights, SAP's share price ought to be at least €40, argues Dresdner Kleinwort (KWFTF) software analyst Adam Shepherd, even factoring in concerns that the company overpaid to add business intelligence to its product portfolio. "They just had a great quarter where they blew out all of the numbers and their core business is in very strong health," Shepherd says.

Indeed, according to preliminary results announced Jan. 14, SAP's total revenues for the fourth quarter are expected to be $4.8 billion, up 10% over the previous year. Total revenues for the full year are expected to be $15.25 billion, an increase of around 9% over 2006. The strong performance in the fourth quarter represents the 16th consecutive quarter of double-digit growth in revenues for SAP at constant currencies.

Maintaining Momentum

The question is whether the German software maker can keep up the momentum. Its share price is suffering from fears that an economic meltdown will slow IT spending in 2008. To be sure, growth for the overall software market is expected to be around 6%, a far cry from the 13.5% historical average growth the industry enjoyed for some 30 years. But SAP maintains—and financial analysts agree—that a consumer-led slowdown will not necessarily lead to less software capital expenditure.

Analysts say SAP is well-positioned to grab business from companies that continue to spend on IT during the downturn. "Growth may moderate, but it will not be as dire as the market is expecting," Shepherd argues. "We think there will still be focus on process optimization in order to reduce cost, and SAP's software underpins all of that activity."