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SAP Sheds Frugal Ways

Shunning organic growth for the moment, the company tries a mega-buck acquisition.

SAN FRANCISCO -- Taking a page from the Oracle (ORCL) - Get Report playbook, SAP's (SAP) - Get Report acquisition Monday of a business intelligence software vendor spells a more flexible attitude at the German software maker.


announced its intent to buy

Business Objects


for $6.8 billion. The deal is expected to close in the first quarter of 2008.

SAP Chief Financial Officer Werner Brandt said roughly half the acquisition price will be paid out of cash, with the remainder to be financed through borrowing that the company intends to repay by the end of 2009.

"It will have some impact on the share buyback for the next two years," Brandt said.

Until now, SAP's mantra has been "organic growth." Hot on the heels of its entry into the on-demand market with its subscription-based Business ByDesign enterprise software suite built in-house, SAP's acquisition of a business software leader acknowledges that the formerly staid company must also grow by acquisition.

Oracle, known as a business-software consolidator, has dramatically increased market share in the past three years by buying companies like PeopleSoft and Siebel and business intelligence vendor Hyperion.

This acquisition leaves



as a possible takeover candidate as the remaining public software supplier with big market share in business intelligence.


(IBM) - Get Report



(HPQ) - Get Report

are often mentioned as companies possibly looking to expand their software lines with a BI supplier.

Cognos shares were recently up nearly 12% to $49.63.

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But this acquisition isn't a reaction to Oracle's aggressive strategy, SAP CEO Henning Kagermann said in a press conference Monday. SAP's performance over the past three to four years demonstrates that SAP has not lost market share to Oracle, he added.

SAP has maintained its dominant lead in software for certain business applications, confirmed Paul Hamerman, analyst with Forrester Research. "Oracle was gaining some ground through PeopleSoft and Siebel." But SAP earns $12 billion annually from business applications, to Oracle's $6.5 billion, Hamerman estimated.

"That lead was not threatened. This is not about applications so much as the adjacent business intelligence stack, where Oracle is very strong," Hamerman said. The Business Objects acquisition "is a big shift in their strategy."


SAP are looking to acquire size and critical mass," Hamerman said. The move is not purely the acquisition of technology and expertise that SAP does not have in-house, he added. "They have the target of doubling

the size of the company by 2010. They are not going to do that organically."

Although SAP hadn't lost yet to Oracle, Hamerman says the move was driven by competitive pressures. "It's a very competitive market. Oracle and


(MSFT) - Get Report

are out there as big competitors that have a lot of assets in business intelligence and performance management."

Following the announcement on Sunday, Business Objects issued a warning that third-quarter earnings would fall short of expectations. EPS, excluding items, will be 36 cents to 39 cents, on revenue of $366 million to $370 million. Analysts had been expecting EPS of 46 cents on a top line of $385.2 million, according to Thomson Financial.

"A large part of the reason we had difficulty was rumors circulating in the market prior to the announcement, prior to the end of the quarter," Business Objects CEO John Schwarz said. "There is nothing structurally wrong with our performance."

"We were open with SAP about the issues we were facing in the quarter before the transaction was announced," Schwarz added.

Business Objects was up $7.29, or 14.5%, to $57.56 in recent trading. SAP was off $3.35, or 5.7%, to $55.88.

Schwarz used the press conference to set the record straight on one point: Business Objects was not "shopping" itself around for a buyer, as reported in the press, he said. Rather, SAP came to the company with a "positive offer."

"We will keep Business Objects as a standalone entity in order to exploit" horizontal markets, Kagermann said. "The combination enables us to cover the entire space as fast as possible and better than anybody else."

Kagermann estimated that the customer base of the two companies currently overlaps by about 40%.

Schwarz estimated that business intelligence software is currently a $10 billion market, growing at 10% a year.

With dual headquarters in France and the U.S., Business Objects makes for a "very complicated acquisition because so many products overlap, particularly in performance management," Hamerman says.

Due to SAP's acquisition of the much smaller OutlookSoft and Business Objects' purchase this year of Cartesis, SAP will now have multiple planning and budgeting systems, financial consolidation products, profitability management tools and offerings in performance scorecarding, Hamerman says.

"They are going to have to articulate a roadmap" for these overlapping products, but likely will not cease to support any because the maintenance fees paid by customers represent "a profitable revenue stream they wouldn't want to jeopardize," Hamerman says.