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Update 2: SAP buys SuccessFactors for $3.4 bn to boost cloud offering

Update 2: SAP buys SuccessFactors for $3.4 bn to boost cloud offering

Cloud-based Human Capital Management company will remain independent of ERP giant

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SAP  is paying $3.4 billion (£2.2 billion) cash for SuccessFactors, a provider of cloud-based human capital management tools.

SAP executives said the move would greatly accelerate the company's push into the cloud application business. The deal, subject to regulatory approvals, is expected to close in the first quarter of 2012, and values SuccessFactors at $40 per share, a 52 percent premium over the company's December 2 closing share price.

Lars Dalgaard, founder and CEO of SuccessFactors, will join SAP to lead its cloud business, while continuing to head the San Mateo, California, company. SAP said that the firm, which has about 1,450 employees, would remain independent.

SAP "shares our cloud vision, and shares our vision for how big and disruptive this opportunity is," said Dalgaard on a conference call to discuss the deal. "We've had an incredible ride for the last ten years," he added, saying that nonetheless the cloud opportunity "is just beginning."

SAP said that the combination of the two companies "will establish an advanced end-to-end offering of cloud and on-premise solutions for managing all relevant business processes." It called SuccessFactors' products "highly complementary" to SAP's HCM offerings as well as SAP Business ByDesign cloud suite and SAP's line of business cloud offerings.

"The cloud is a core of SAP's future growth, and the combination of SuccessFactors' leadership team and technology with SAP will create a cloud powerhouse. The acquisition will help us address the top priority for CEOs globally -- managing people and talent," said Bill McDermott, Co-CEO, SAP, in a statement.

Constellation Research CEO and analyst Ray Wang tweeted that SAP's acquisition of SuccessFactors is designed to compete directly with Workday which is "eating up marketshare".

Wang said, “While the core offerings provided a solid approach, these applications remained in the systems of transaction world and lacked many of the newer requirements for systems of engagement. In fact, many customers left SAP to go to SuccessFactors to accelerate innovation in the talent space.

“The rise of Taleo, Workday, and Ultimate Software comes from the lack of general innovation in the HCM space by legacy vendors such as Oracle, PeopleSoft, and SAP. Cloud computing provided the opportunity to deliver rapid innovation to customers. Consequently, existing customers will welcome the move while best of breed purists will have to overcome the surprise and determine how innovative they expect SAP to become in HCM.”

According to SAP, SuccessFactors operates the largest scale of paying cloud users with 15 million subscription seats. It has more than 3,500 customers in 168 countries, and recorded 77 percent revenue growth year-over-year in the third quarter 2011 and 59 percent revenue growth year-over-year in the first nine months of 2011.

Forrester analyst Paul Hamerman noted in a blog post  that not only the premium SAP paid for SuccessFactors but also that the purchase price was about ten times revenues. "SAP's cloud strategy has been struggling with time-to-market issues, and its core on-premise HR management software has been at competitive disadvantage with best-of-breed solutions in areas such as employee performance, succession planning and learning management. By acquiring SuccessFactors, SAP puts itself into a much stronger competitive position in human resources applications and reaffirms its commitment to software-as-a-service as a key business model," he wrote.

Meshing the company cultures will be an area to watch, according to Hamerman's colleague at Forrester, analyst China Martens. Also, "it will be interesting to see how SAP incorporate SFSF into its existing HCM, particularly as SFSF does address both SMB and enterprise customers," she added via email. "I'd expect to see more consolidation in the HCM arena and other largely on-premise ERP players looking at deeper partnerships and/or acquisitions of SaaS HCM pure-plays."

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