SuccessFactors And SAP’s Sense Of Value

Over the weekend, SAP acquired HR vendor SuccessFactors in a piece of news that was welcomed by snores among the Techcrunch consumer IT crowd.

At Forrester, Paul Hamerman gave a succinct summary of the valuation:

SAP is a paying a substantial premium to acquire SuccessFactors, a leading SaaS performance and talent management vendor. The press release of December 3, 2011 states that the deal price of $40 per share is a 52% premium over the Dec. 2 closing stock price. Even more startling is that SuccessFactors has a revenue run rate of roughly $300 to $330 million for 2011, and the acquisition price of $3.4 billion is more than 10 times revenue!

via Paul Hamerman

In other words, it’s a big number but what does it mean?

Without listening to the analyst calls, here are a few things the price probably tells us:

  1. SAP needed the deal more than SuccessFactors – It’s hard to justify a 10x revenue multiple in this economy any other way.

  2. SuccessFactors was not a forced seller – the opposite of the previous point but really worth stating. The SuccessFactors Board got a big number so obviously didn’t feel like a forced seller in this market.

  3. The cloud business model in HR is the future – I noted before that IT professionals need to get over their cloud security concerns since the battle has been decided in the the HR tech market. Almost all of the innovation and new entrants are on some sort of cloud-based computing model. SAP has provided a huge validation of that direction.

  4. Workday is the winner – If they are really really going for an IPO in 2012, this is a great valuation reference point.

Will it work?

As a bolt-on line of business acquisition, it’s hard to fault the logic. SAP is the top provider globally of transactional HR systems but weak in the more value-add areas of HR. SuccessFactors neatly provides both growth and innovation.

As an entry into the cloud, I’m not sure that it make any difference. SuccessFactors is still under 2% of the revenues of the combined entity and the addition of their multi-tenanted cloud offering adds another reference architecture to SAP’s portfolio rather than streamlining it. If they integrate it tightly, they are likely to lose the innovation they were hoping to buy and, if they don’t, they probably overpaid.

So far they have indicated that they will run it as a separate business. The bolder move might to follow IBM’s lead. When Big Blue bought Lombardi, Phil Gilbert from the Lombardi came to run the Websphere BPM product strategy.