A couple of weeks ago, Phil Wainewright mused on what it would mean for his model of the digital economy if SAP acquired Concur:
I realized that if SAP were to put Concur together with its existing acquisitions of Ariba in supply chain management and Fieldglass in contingent labor management then it would instantly have a huge footprint in this segment.
Today, we saw confirmation of Phil's thinking when SAP announced it has come to a definitive agreement to acquire Concur for an eye watering $8.3 billion. The deal will be funded by a €7 billion ($9 billion) credit line and is expected to close in Q4 2014 or Q1 2015.
The numbers are indeed mind blowing. Here are some from the press release and analyst call with SAP:
- The combined networks of Concur, Ariba, Fieldglass transact $600 billion. The worldwide travel and expense spend category alone is estimated at $1.2 trillion.
- Only 30% of Concur customers currently run SAP, presenting a dynamic opportunity to introduce SAP innovations to the Concur install base.
- Concur has trailing revenues of $700 million of which 84% comes from the US. The opportunity to scale inside the SAP customer portfolio is therefore significant.
- SAP estimates the combination of Ariba, Fieldglass and Concur provide an opportunity to manage up to $10 trillion in global spend.
As can be imagined, Bill McDermott, CEO SAP was genuinely excited:
"They [Concur] empower the individual. so you know Tripit will dynamically manage your itinerary, tell you about flight plan changes and offer you alternatives if there's a cancellation. All expenses can be done on your mobile device...I can imagine paying for my Starbucks and if it's a business expense then boom! One click and its done and in the system. Simple."
Steve Singh, CEO Concur squished rumors that the company had been up for sale:
"The company was not up for sale. Great companies get bought, not sold...We knew we want to be part of a company that has the same values as we and we want to deliver travel and expense to everyone. We saw a tremendous opportunity for stronger growth, just in cross selling to SAP customers."
One of the main attraction to SAP is the prospect of building up on Concur's track record in government. Singh said:
"Governments are looking for commercial grade software they can run at a more cost effective model. We think we have that model. [On international] If you can meet the needs of US civilian agencies then you should be able to meet the needs of agencies around the world."
Analysts were naturally interested in discovering what this means for SAP profitability and credit rating. Here, Luka Mucic, CFO SAP was understandably coy though he did provide pointers on where SAP's cloud growth will come from:
"We cannot say what the rating agencies will announce but you can take it as safe to rely on the rating. For me the big charm comes in scaling the network. We can make money while we sleep and I like that model a lot. This has the possibility to be very profitable."
It was another polished performance for a CFO who speaks my language but I was left with one question. If the deal is for $8.3 billion, then why is SAP looking for a $9 billion credit line? My guess is that today, the company isn't generating enough cashflow to give it the wiggle room it needs to keep on the right side of a well formed balance sheet. Side note: SAP says the deal will be accretive to earnings in 2016.
Cloud growth from networks - not HANA
Earlier in the week, Mucic addressed SAP's cloud growth prospects and indicated SAP will triple SaaS run rate by 2017. Most of us on the call were skeptical where that comes from. Now we know - or at least we have a good idea where a large chunk of that change comes from. This is very important because what is becoming clear is that SAP is counting much more on the network part of its cloud growth equation than it is on pure play SaaS or even PaaS.
This has the effect of drawing attention away from the muddy HEC/HCP discussion (see the long comments thread) and I welcome that. SAP really does have to get its own cloud story right so right now it's safe to assume that what SAP is really doing is buying its way into cloud credibility by buying out the largest category players it can muster. To the side, the HANA cloud teams will have to step up rather smartly or see their efforts relegated to second tier.
That in itself has significant implications for both SAP's business model and the ecosystem around it. My bet is that SAP leadership will use the experience they gain from Ariba, Fieldglass and now Concur to build out a fresh implementation model that adheres more closely to McDermott's 'simple' mantra. This will include dramatically reduced consulting costs which are an absolute necessity in a low cost cloud world. IBM, Deloitte, Accenture? You'd better be paying attention.
Will it blend?
The acquisition adds fuel to the need for SAP to transform more quickly for the digital age. So far it has not demonstrated enough progress for anlaysts to be convinced. Steve Singh has been here before. As Phil said in his speculative piece on an SAP/Concur marriage:
One of the unique facets of the leadership team at Concur is its experience not only of running a publicly quoted cloud company but also of making the transition, while a public company, as a traditional licensed software vendor to the cloud model. It just happens that Ariba is one of the few other companies to have attempted this and succeeded, but Concur was pretty much the first.
I don’t believe large companies can make the conversion. Forget their genetic code. How many will take the pain? Companies won’t reinvent themselves. Think of taking a $40 billion company to on-demand. The value of the business will go through huge negative change. It will get crushed. Cash flow will get crushed. You have to layoff. The transition is really hard and it’s very sudden. If you’re north of $100 million it’s hard. Over $1 billion it’s impossible.
Today, of course, large companies are coming round to the inevitability of that course and we see some of the difficulties beginning to emerge as SAP makes that transition. Having survived with the scars of Concur’s earlier experience, Singh and colleagues (including his brother Rajeev, who is COO) could perhaps make an invaluable contribution to SAP’s cultural readiness to face its own cloud destiny. Unless, that is, they have other plans after selling up.
We have been here before. When SAP acquired Ariba, I expected Ariba CEO Bob Calderoni to have a pivotal role in steering that transition. It didn't happen. Calderoni turned out to be a PR liability that SAP failed to protect and he quickly faded into the background. Given Singh's past comments, I wonder what happens next. We can but wait and see. My guess though is that by concentrating upon the networks aspect of this and other acquisitions, SAP can dodge a bullet while it figures out the next step on the cloud path.