The top players in the international software and consulting business are engaging all-out in a growth-through-acquisitions strategy. Industry leader
Oracle
(ORCL)
has spent about $30 billion to acquire more than 30 companies in the past three years, and its recent $6.7 billion hostile bid to acquire
BEA Systems
(BEAS)
, which specializes in financial systems applications in particular, is still unresolved.
On the other hand, business intelligence software world leader
SAP
(SAP)
seems to have been more successful in its French-German rapprochement; it recently acquired
Business Objects
(BOBJ)
for a meager $6.8 billion. Despite recent successes, such as landing
Wal-Mart
(WMT)
as a client, SAP lacks visibility in the key small-to-medium business market.
As well, investors seemed unconvinced that the German company was on a growth path, despite the fact that the company's third-quarter profit rose by 10%. The disappointing recent stock market performance of SAP can be seen in the following graph, where SAP's five-year and one-year returns averaged 36% and 15%, respectively, compared with Business Objects' 55.6% and 83%. SAP's dividend yield, at 0.9%, is low; by contrast, Business Objects paid no dividends over the past year.
 |
| Source: Source: http://finance.yahoo.com |
The target is in a worse position than the bidder. It is typical to consider a merger worthwhile if there is something the target has that is worthwhile to the bidder and that will increase the post-merger synergies. However, in the case of the Business Objects-SAP merger, this doesn't seem to be the case, as the following table shows, based on the third-quarter 2007 results of the two companies.
| Company |
Growth in license revenues |
Growth in services revenues |
License revenues as % of total revenues |
Services revenues as % of total revenues |
Growth in Americas revenues |
Growth in EMEA revenues |
Growth in Asia Pacific revenues |
Growth in EPS |
| BOBJ |
6% |
29% |
38% |
62% |
13% |
29% |
16% |
-67% |
| SAP |
16% |
3% |
72% |
28% |
6% |
10% |
16% |
10.30% |
In its release, Business Objects pointed out that lower license revenue caused the dip in earnings this quarter. While Business Objects seems to do better than its acquirer in services revenue, for the most part most of the income metrics are worse for the French company than for its German competitor.
It should be remembered that Business Objects started in 1990 as the feisty French underdog in the business software sector, determined to prove French efficiency and savoir-faire. (It still has some of its old flair; the growth in Business Objects' R&D revenue, at 18%, far outpaced the 8% growth of SAP's R&D.) All of the figures above represent year-on-year growth.
Note the target's troubled balance sheet position. While the third-quarter revenue trends for Business Objects might be dismissed as short-term, what is even more troubling is the company's balance sheet situation.
Now, SAP's balance sheet is nothing to write home about (cash declined by 23% for the German company, but so did debt, which dropped by 10.4%). It should be noted that SAP doesn't provide an explicit statement of its debt situation, but classifies them as "other liabilities," a grab-bag that could consist of pension and retirement obligations as well as debt -- so I can only assume that "other liabilities" may refer to debt.
On the other hand, Business Objects' situation is even less transparent. Its balance sheet is riddled with such payables as "short-term" and "long-term" escrows. A related item on the asset side is "restricted cash," which was an issue I have already addressed in a previous post on BOBJ in September 2006. At that time as well, I noted that BOBJ posted declining license revenue, an ostensibly decent cash position, which was negated by an increase of its restricted cash assets which were directly linked to liabilities in escrow.
While Business Objects' overall cash position increased by 82% to $930 million, restricted cash declined slightly by 13%. But it should be noted that this restricted cash was linked to a bunch of escrow accounts related to a successive past acquisition as well as an ongoing patent infringement against Business Objects' subsidiary Acta, which reinforced Business Objects' position in database management.
On the liability side, Business Objects' level of escrows payables increased by 79%, while the company holds $640 million in long-term convertible debt. These two items (long- and short-term escrows payable and the debt) constitute 38% of total equity, a considerable increase over the 2% share of these variables in total equity in December 2006.
What does all this mean to an investor? I'm not convinced that the Business Objects acquisition makes sense to a company like SAP, which seems to be licking its wounds and slowly inching itself ahead, especially in India. So, while I did have a long in SAP, I have decided to unwind it as a result of the recent merger.
I have no positions in Business Objects because of the company's balance sheet, which has remained in a difficult position for as long as I can remember, notwithstanding the company's leading position in the business intelligence market.
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