SAP to IPO Qualtrics - we called it in 2019

Just as I was hoping to get a rare good night's sleep, SAP announced its intent to IPO Qualtrics, the $8 billion acquisition it made in early 2019.

At the time there was much talk about whether it was the right move for the company. I was reasonably bullish and remained so, despite many thinking it was a bad deal. What we didn't discover until later on was that this was the catalyst for Elliott Management's efforts to extract value from SAP and if not directly then indirectly in securing Bill McDermott's departure as CEO and Klein's eventual succession to the top spot.

At the time of the Elliott involvement Brian Sommer and I laid out possible actions. Right in the middle, we argued (mostly Brian, not me) that spin outs could be part of the equation. In this story for example, we asked:

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?

Earlier we speculated that Elliott might force the sale or spin out of of underperforming assets. 

Now and on the eve of SAP's upcoming Q2 FY2020 earnings we know the answer to that question. Drama? You can't make this stuff up. 

SAP says that Qualtrics is growing at a fast clip with Klein quoted as saying:

SAP's acquisition of Qualtrics has been a great success and has outperformed our expectations with 2019 cloud growth in excess of 40%, demonstrating very strong performance in the current setup. As Ryan Smith, Zig Serafin and I worked together, we decided that an IPO would provide the greatest opportunity for Qualtrics to grow the experience management category, serve its customers, explore its own acquisition strategy, and continue building the best talent. SAP will remain Qualtrics' largest and most important go-to-market and research and development (R&D) partner while giving Qualtrics greater independence to broaden its base by partnering and building out the entire experience management ecosystem.

Interestingly, Smith said that he wants to be Qualtrics's largest independent shareholder. What that means has yet to be detailed; 10%, 20% more? 

What's going on? 

Depending on who you talk to the answer is a combination of at least some of:

• XM is a poor fit for SAP right now but as a category leader it makes sense for Qualtrics to shape its own destiny. 
• SAP still sees value in XM but can't quite bring itself to admit defeat under its stewardship. It's a case of spin out or lose the founders. 
• SAP wants its whole business to be run on German lines. Qualtrics doesn't fit that mold yet Smith and Co have plenty of runway with which to grow the business along US managed lines. 
• An IPO provides SAP with much needed cash with which to reinvest in the core technology and realize its customers' dream of a modern, truly end to end, integrated process management system.
• Removing Qualtrics from the equation allows SAP to simplify its market messaging for its core offerings and focus directly on S/4HANA which has to succeed if SAP's future is to be cemented. 

Let's be clear. This is not a done deal. The announcement is vague on timing and there is enough of an implied timeline to assume any transaction will not occur before the end of this current financial year. However, the timing of the announcement is curious. Who puts out block buster press releases at 11.02pm on the eve of an earnings call date unless there is the intent to measure market readiness for this offering during the analyst call due less than 24 hours later? We know enough about the Q2 result to be sure that this announcement will devour much of the call question time. 

Do we think it's a good idea? I've not had time to discuss this with Brian in any depth but my gut check view is that 'yes' this is a good idea. It clarifies many of the topics with which SAP is wrestling, allows leadership to focus without distraction and releases cash. What's not to like about that? Will there be other divestments? Who knows but of one thing you can be sure: there's rarely a dull moment at SAP.