In our last review of Elliott Management's actions, we focused on Citrix, Cognizant and, BMC. The reason for that is each provides clues as to how the activist approaches its tech targets when those deals are led by Jesse Cohn.
Throughout our reporting of the SAP/Elliott story, we have avoided speculation regarding the future of SAP. We, like others, have our best guesses but we’ll keep these to ourselves.
The difficulty today is that we don't know for certain how this will play out or indeed the specifics of the SAP deal. What we can say is that unlike the three we chose to review, Elliott Management has not publicly released the content of its shareholder letter to the SAP board. As we pointed out in earlier stories, there are many possible outcomes. Why is this important to buyers?
As we have researched for these stories we have found three common threads among those in the SAP ecosystem. That includes partners, customers, employees, and the independent developer communities.
- A modest number of those who have been around SAP a long time are concerned about what this means for R&D and the future of the product portfolio. Those concerns range from questions about integration to development commitments across the product lines.
- A good number are tangentially aware of the situation and hope that regardless of any internal financial engineering, it will be business as usual. That is especially true among the S/4HANA crowd who are seeing plenty of big-ticket work ahead.
- A worrying number of people are oblivious to the situation or don't understand where this could go.
Based on our research to date, this currently looks like a friendly arrangement of the kind that Elliott Management successfully pursued with Cognizant and, to a slightly lesser extent Citrix. One thing that is clear, Elliott Management is not your badass corporate raider or asset stripper of the type imagined in popular culture. Instead, it is deliberate, clear in its approach and open to discussions where that makes sense. Rather, we'd describe Elliott Management as a firm of expert financial engineers.
Based upon what we found, both Citrix and Cognizant were considering some of the actions that Elliott Management proposed at the time that Elliott took its stake. In that regard, there was a commonality of purpose. That, in turn, means that the relationship got off on a good footing and, from what we can see, has remained largely collegiate. In the Citrix case, despite significant changes, Citrix continues to grow. If anything, that should be a comfort point although as we have already evidenced, that is not the only possible outcome.
Make no mistake, despite the understandable concern about Elliott Management's involvement with SAP, this is just as big a deal for them as it is for SAP. They will not take any precipitous action without carefully weighing all options.
We also have to bear in mind that this is very early in the game. Some questions will weigh more heavily than others, while some questions may be irrelevant. What we can expect however is that in the lead up to the special Capital Markets Day event in November, SAP will flesh out its current position, providing the market with information with which it has the highest degree of confidence. Those will most likely come during the financial analyst conference calls following Q2/Q3 FY2019. But don't expect too much.
Given what has gone before, what reasonable questions should be raised? As we have said earlier, it is early and some questions are likely impossible to answer in the near term. All are based on questions that have been put to us, are part of the general Elliott playbook or which come out of experience in seeing a material change of control, a topic about which all readers should familiarize themselves.
The reason we pose these questions now is that sales and implementation cycles for SAP software are typically long haul affairs, carrying their own risks at different stages.
Software Buyers & Customers
- Will SAP consider spinning off portions of the company?
- Should SAP sell/spin off some of its products/product lines, how are software buyers protected in the event of a material change of control?
- If SAP has to assume more debt, how can we be sure that the increased debt service costs won’t impact future R&D/innovation spending?
- How will SAP increase its operating margins without passing along higher costs (or reducing the size of discounts offered prospective customers)? If operating margins grow due to internal cost reductions, then how will this affect customer pre/post-sales support, maintenance, problem resolution, R&D, etc.?
- Will Elliott Management insist on cost reduction? How do these impact pre-announced product roadmaps and timetables?
- Will SAP’s new push to expand its operating margins result in increased customer audits, a resumption of Indirect Access litigation, etc?
- What happens to SAPPHIRE and TechEd in a post-Elliott Management world? Do they stay? Do they get reduced in scope?
- Will my account manager or sales executive change?
- Should I wait to make a purchase/upgrade decision until these matters are resolved?
- How should customers plan their technology purchases/upgrades?
- Will Elliott get SAP to change its decision to drop support for other non-Hana databases in 2025?
- Will this matter trigger more organizational and leadership restructuring within SAP?
Our questions on R&D are particularly important for an expansive portfolio that urgently needs unifying into a single cloud deployable codebase. This has been much discussed in recent times albeit that conversation has rumbled around SAP for many years in one form or another. Christian Klein made a solid commitment to integration at SAPPHIRE Now 2019 which we welcomed. DSAG says it is the number one imperative. We hear that elsewhere too with developers like Graham Robinson rightly noting that "It's a lot of work." It also requires extreme focus and clarity.
A 90-day action plan for buyers
- Sit-tight and get prepared - This isn’t the time to panic but it is a time to reflect and prepare. Get familiar with what kinds of changes that activist shareholder firms trigger. Review your software contracts. Are there material change of control clauses in these? What rights do you have in these documents? Plan for several contingencies.
- Monitor the situation – SAP has promised more information will be shared at their November Capital Markets Day. Keep an eye on how this evolving activist stake could impact your planned SAP roadmaps and projects.
- Expect some surprises – There could be:
- Spin-offs with new owners possible
- Changes in the product roadmaps
- Changes in account management
- Changes in fees, licenses, etc that customers will need to pay
- Changes in SAP’s governance
- Changes in SAP’s capital structure
- Take time to audit-proof your SAP usage – We already know that Elliott wants SAP to improve its operating margins. But how it will do so is an open point. So, to make sure, your firm isn’t needlessly helping with their margin issues, check out the following tasks.
- Conduct your own SAM (Software Asset Management) audit and ensure your compliance with SAP contracts.
- Minimize your Indirect Access exposure, and, if relevant, evaluate SAP's Digital Access Adoption Program.
- Review your contracts - Vendors are rarely kind to you when you have an ownership change, acquire a new division, do a divestiture, etc – Is it time to return the favor?