SAP's Business Intelligence Leap

To expand in one of business software's hottest sectors, the German giant detours from its organic growth plan and agrees to buy Business Objects for $6.8 billion

by Aaron Ricadela

In the rapidly consolidating business software market, SAP (SAP) has taken a conservative tack, preferring to rely on growth through sales of its own meticulously engineered products. But on Oct. 7, Chief Executive Henning Kagermann ditched his playbook, announcing a $6.8 billion deal to acquire Business Objects that could signal the German software giant's willingness to buy its way into new areas of the corporate software market.

The deal would vault SAP, the world's third-largest software maker, squarely into one of the software industry's hottest sectors. Business Objects (BOBJ) competes in the fast-growing market for software that helps companies plan budgets, close their books, and divine their most profitable customers. Together with an aggressive push by SAP into selling software aimed at small and midsize companies, adding business intelligence to its portfolio could help SAP win new customers at a time when sales growth has slowed for its traditional manufacturing and supply-chain management software. "This is a space where we decided that, with acquisitions, we'll be more successful," Kagermann told reporters and analysts in a hastily arranged conference call from Germany on Oct. 7. "It accelerates significantly our growth potential."

The boards of Walldorf (Germany)-based SAP and Paris-based Business Objects approved the proposed deal after negotiations that ended on the night of Oct. 7 in Germany. SAP will offer €42, or $59.37, in cash per share of Business Objects, an 18% premium over the $50.27 closing price of the shares on Oct. 5, the last day of trading before the acquisition was announced. The deal is expected to close in the first quarter of 2008 and add to SAP's earnings by 2009. (Kagermann said SAP's 2008 earnings will dip by about 7¢ per share due to one-time costs of buying Business Objects.)

More Large Acquisitions Ahead?

Sales of data analysis software, which includes business intelligence programs, hit nearly $23 billion last year—about half the size of the market for business applications (which form the core of SAP's business), according to AMR Research. But within the data analysis category, sales of business intelligence software grew 10%, to $6.35 billion, and sales of "scorecard" software that helps executives digest key numbers shot up 26% to $5.2 billion, according to AMR. SAP's bet: that it can combine Business Objects' technology with its own applications to create even more sales opportunities, Kagermann said.

Business Objects' software could help SAP customers extract more insight from their data to make better forecasts, says Joshua Greeenbaum, principal of Enterprise Applications Consulting. "They're saying this is going to be one of the key growth areas for SAP," says Greeenbaum. If SAP can make the deal work, it could look to buy growth in other areas, such as banking software, he adds. "This signifies that there is an appetite for very large acquisitions. That's something SAP said was not possible."

The proposed acquisition of Business Objects comes as competitors Oracle (ORCL), IBM (IBM), Hewlett-Packard (HPQ), and Microsoft (MSFT) have stepped up the pace of buyouts in the corporate software sector. Oracle has shelled out $25 billion the last three years to acquire about 30 software companies, and IBM has spent roughly $5 billion on software acquisitions since 2006.

A Target Oracle Dismissed

Oracle had already staked out ground in the business intelligence market, spending $3.3 billion to acquire Hyperion Solutions on Mar. 1 (BusinessWeek, 3/2/07). That tieup was a particular jab at SAP—more than half of Hyperion's customers also used software from SAP, according to AMR. Now, SAP has the chance to hit back.