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Cloud Premiums Fall in SAP's $4.3B Deal for Ariba

Late in 2011, SAP and IBM both paid over 50% premiums to buy up cloud businesses like SuccessFactors (SFSF) and DemandTec, respectively, fanning speculation of a M&A boom for cloud assets.

However, after those deals some analysts cautioned that premiums for cloud companies were set to fall as competition intensified. For some, Oracle's February acquisition of cloud-based HR management systems provider Taleo (TLEO) at a sub-20% premium solidified the notion that competition in the sector was ratcheting up and premiums were falling.

"[T]he decisions by RightNow, SFSF, and Taleo to sell may have been motivated by a belief that either their product reach was too narrow, too highly penetrated and that the cost of building an integrated suite was simply too high," wrote BMO Capital Markets analyst Karl Keirstead in a February note reacting to Oracle's acquisition.

Ariba, which saw revenue grow 38.5% in 2011 to $444 million may be a further signal of the notion, as M&A expectations continue to drive share valuations.

Cloud-focused IT and business services companies as large as (CRM) and NetSuite (N), and as specialized as Kenexa (KNXA), Saba Software (SABA) and Cornerstone OnDemand (CSOD) were relatively unchanged on news of SAP's Tuesday acquisition.

BMC Software (BMC), a business IT software and hardware services specialist was also little changed in Tuesday trading, even after activist fund Elliott Associates took a 5.45% stake in the company in May and asked that it consider M&A bids from strategic buyers and private equity firms that would realize the value of its cloud assets.

Still there is no shortage of M&A expectations for companies with cloud and SaaS assets ranging from HR services, supplier procurement and sales leads to virtual data management. Ariba competitors Concur Technologies (CNQR) and supply chain specialist SciQuest (SCI) rose over 3% in late Tuesday trading.

"The recent M&A activity in the Cloud/SaaS sector is being driven by a seismic shift to cloud computing, in our opinion," wrote Jeffrey Houston of Barrington Research in a Jan. 23 note on M&A expectations for the sector. "We are roughly 10 years into this shift, which should last another 10-20 years," the analyst added. He recommended SPS Commerce (SPSC) and RealPage (RP) as attractively priced.

-- Written by Antoine Gara in New York.
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