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

NEW YORK ( TheStreet) -- German IT services giant SAP ( SAP) is buying Ariba ( ARBA) for $4.3 billion in a cloud push that puts it out in front of Oracle ( ORCL) in the rush to buy up companies with IT services that can be accessed remotely.

Already, SAP cut one of the biggest cloud computing deals in its $3.4 billion December acquisition of SuccessFactors ( SFSF).

With Ariba, SAP is now the top aggressor in cloud M&A. However, its $45 a share offer represents a 20% premium to Ariba's May 21 closing price, and that's a sign that premiums for cloud-based acquisitions by SAP and other acquirers in the tech sector may be falling amid increasing competition.
SAP buys Ariba for half the premium of its next biggest cloud deal.

Companies with cloud-based products are increasingly attractive for the likes of SAP, Oracle ( ORCL) and IBM ( IBM) as they add to product bundles and shift their data and IT services to virtual networks.

Ariba is the second largest cloud vendor by revenue.

Last week, SAP announced the roadmap for its cloud applications business, also called "Saas, or software-as-a-service." The Walldorf, Germany-based company said it will focus on cloud business services to manage people, money, customers and suppliers via its SAP Business ByDesign and SAP Business One offerings.

"Cloud-based collaboration is redefining business network innovation, and we are catching this wave in the early stage of its evolution," said SAP co-CEOs Bill McDermott and Jim Hagemann Snab in a release. "The addition of Ariba will create the business network of the future, deliver immediate value to our customers and provide another solid engine for driving SAP's growth in the cloud."

SuccessFactors is a HR management service, while Ariba is a commerce network.

SAP is targeting Ariba's enterprise and procurement trading network that connects and automates more than $319 billion in virtual commercial transactions among 730,000 companies. "Already today 63% of the world's transaction revenue touches an SAP system. SAP and Ariba will facilitate collaborative commerce within and between companies of all sizes," SAP said.

Ariba shares rose over 19% to $44.78 in Tuesday trading after the deal was announced, while SAP shares fell less than 1% to $58.69. The deal is expected to close in the third quarter.

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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.