SAP Has Bitten Off Too Much With BOBJ

The top players in the international software and consulting business are engaging all-out in a growth-through-acquisitions strategy. Industry leader Oracle (ORCL - commentary - Cramer's Take) 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 - commentary - Cramer's Take), which specializes in financial systems applications in particular, is still unresolved.

On the other hand, business intelligence software world leader SAP (SAP - commentary - Cramer's Take) seems to have been more successful in its French-German rapprochement; it recently acquired Business Objects (BOBJ - commentary - Cramer's Take) for a meager $6.8 billion. Despite recent successes, such as landing Wal-Mart (WMT - commentary - Cramer's Take) 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.

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.

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Vasu Vijayraghavan was an academic finance professor at the University of Paris who has now turned to a new career as a financial consultant. As an academic, she wrote on corporate governance issues, especially in the European context, and she believes in a long-run and balance sheet approach to stock picking.

Currently, Vasu is working as a consultant for lawyers, doing business valuation. She is a Level II CFA candidate and enjoys writing long/short and earnings calls pieces for TheStreet.Com.

Vasu holds a Ph.D. from the University of Michigan and a B.A. from Harvard University.