I'm baffled by the price SAP paid tbh. The price SAP is paying for Qualtrics equates to around 20X sales, and there is no indication there is huge growth on the horizon or that this is a long term market.
I'm scratching my head on this one as well. Survey Monkey's market cap is somewhere around $1.3B. Medallia's current valuation is unknown, but should be under $3B. Qualtrics plays in the space in between these two and even though it has a strong following and good growth prospects, it still seems like SAP paid about double what they should have. My best guess is someone has a convoluted plan to integrate Qualtrics into SAP as a module that enough customers will pay for to make it worthwhile.
Who cares about the sales? The profit is anemic! This is nothing more but madness of the corporate crowd. Lot's of dumb money are swishing around looking for a safe space and the next big thing. :-/
SAP is not paying for the product here. SAP is paying for the long list of customers using and relying on Qualtrics today [1], many of whom are Fortune 500 and government agencies.
I haven't understood the deep meaning of several of the deals that are reaping huge benefits, so I really have no sense of what works and what doesn't.
Clearly at some level, the SAP sales force attacking on a new product provides unextracted value from an acquisition.
8 Billions worth on a survey company, seems far fetched, but maybe they do have intrinsic value that far exceeds those words, and match a need that customers want to fill.
You can never say for sure when it comes to an individual example but, this seems like a wide effect of macroeconomics.
There is a ton of economic pressure right now to "put money to work." Interest rates have been low for a long time and industry is, for the most part, cashed up already. This means prices get high.
There were obvious seeds sown internationally after the banking crash, but I think tech companies may have something to do with it too.
Think of Tesla, a car manufacturer, and how different that is from a Facebook or Amazon.
Musk had to sell all shares (holding onto voting rights) and raise as much debt as he could. Tesla is still capital constrained.
Meanwhile, Amazon, Google and even apple are headed towards $1trn valuations without cash problems at all.
These companies basically create massive book assets (and income streams) without requiring much capital, or being capital constrained.
The growth potential and the cash needs are just not in the same place. This part of the economy isn't growing out "investment." It's adding to the lake of corporate cash, but corporate cash doesn't isn't used to make or grow googles.
We saw the baby version of this when of was writing about founders starting to keep majority ownership.
[..]I think tech companies may have something to do with it too.These companies basically create massive book assets (and income streams) without requiring much capital, or being capital constrained.
John Van Reenen talks about this in this paper [1]. He has been looking into how and why the giant companies have been concentrating all power in their market : Amazon, Google,...
His hypothesis is that to become a giant company you used to need capital to buy the best factory and the best machines but that nowadays to become big you need to have the best version of intangible capital : proprietary software, users' data,...
Markets become winner takes all and this creates the rise of "superstar companies". To become a giant company you can't just dump money at the problem anymore to build, say, a new factory. The only way to dominate search is to have Google's tech along with users and the data they generate. To become a retail giant you invest heavily in logistics and inventory control management.
This has several consequences :
- You don't need to borrow mass amount of money to become big.
- Changing the interest rate doesn't have as big as an impact as before (if you don't need large amount of capital to grow big, making money more expensive won't prevent companies to grow big).
- wages inequality rise (the few workers that produce the intangible capital in the have high wage while wage become stagnant for the rest)
Buying millions of machines, running in 100 data-centre, has the same capital of building a factory. I doubt a startup can compete with a giant without a lot of money for hardware and people to code
Your focus is too narrow, you have to look at other industries too.
For example in beverages and fashion the capital needed for production is very limited, it's all about marketing and getting marketshare. Software is a mix where building is not as trivial, but it's for those big companies mostly about positioning and sales.
Those industries are much more sensitive about ROI, it's not easy to find ways to spend you money in those areas.
Google/Apple/Facebook are just very profitable companies with in internal investment arm because they don't pay dividends or make huge buybacks, what a traditional company like CocaCola would do with those huge profits.
There are investment companies with hundreds of billions under management, so that's also nothing out of the ordinary.
So the money is still invested, those companies don't have their billions on a bank account. Only this way those companies still have access and control over it, for acquisitions for example. Is that a good thing? Probably better than in some random fund owned by some individuals who are much more risk averse.
Tesla is another story, but from an outside perspective it's just very risky. They could've easily went bust if the Model 3 production went south, that's why it's tough for him to raise capital. Not many entities can gamble like that with billions, if it was a sure deal there would easily be enough capital available for Tesla. Look at the balance sheets of mayor car companies, for example Daimler has a quarter of a trillion in assets.
I don't think the difference between Tesla and most tech companies is just risk though. Tesla is definitely taking way more risk than "normal" but I think they are still getting a great price for equity. They're still trading at a nice multiple of revenue, especially considering debt.
I think there is a real difference in how the money works.
Tesla's equity was not, for the most part, poofed into existence by the market's expectations of future success. It was invested into the company. People wrote checks. Tesla built factories, made cars. The value of equity fluctuated and people made some market gains, but a substantial portion of the dollar value in Tesla right now was put there by investors.
Google or Facebook never needed money. They needed a market for their shares, but they didn't need to raise capital.
I think you're probably right about the narrow focus. More of the economy is more like FB and less like Tesla today.
If Tesla has more/less capital available, they can put it to work in the way whiteboard economics works. Increase capacity, produce more units, R&D... Facebook can't. Financial markets can affect its share price, but they really don't directly affect what FB can/will do.
My very long winded point is that the prevalence of fb-like companies makes money markets less reactive, and explain why prices are so high for assets. Big segments of the market can happily pocket increases in equity value, but they are supplier of capital, not consumers of capital like they're supposed to be.
" beverages and fashion the capital needed for production is very limited"
Disagree here, working capital is the hardest thing by far for any company that 'makes stuff'. Inventory is very expensive. Shipping. Faulty units. Returns.
As for dividends ...
Dividends simply don't matter. Either you own the cash via stock ownership, or they return it to you. It's more a matter of how that capital can be put to work - who is better - Google, or you? Depends on the company there.
I think it makes sense because SAP is focussed on operations management (inherently inside your business) and Qualtrics is focussed on whats happening outside your business.
If you marry the two in an integrated way you cover the entire chain from "raw supplies in from this supplier through to customer not happy about quality of material from that supplier".
So while on it's own Qualtrics might not be worth 8bn to anyone else it might well be worth 8bn to SAP.
The octopuses from ERP market acquire businesses to take over their market share and paying customer base. Ideally a customer base which is locked-in. Know-how, technologies, industry - these are irrelevant.
The middle range of the IPO put Qualtrics at a $4B valuation, so SAP bought it for 2x market open.
Seems they're trying to buy the customer feedback "experience management" angle to close the loop on their financial and ERP systems used to create and deliver products. It sounds nice in theory but these integrations rarely work and its doubtful most companies would use the whole suite or even use them together, even if offered by the same vendor.
SAP might be trying to reach into the "cloud" market by throwing cash, but I can't think of a single example where this has been a great success.
Talking to a sales guy is at best inefficient, most likely a waste of time, and at worst, torture.
Lies, broken promises, tacky tactics. They will defend the "value-add" of their profession but it's a complete and utter joke.
I used to work sales at Oracle selling StorageTek libraries.
Google, Apple, Salesforce etc would just draft up POs themselves and send them straight for processing without ever talking to the sales guy about anything.
Thankfully I now work in support at a consumer heating oil delivery company and I feel like I'm infinitely more helpful and engaged in my work.
In 2011 SAP bought Successfactors, for 3.4bn. The "maven" CEO, Lars Dalgaard, was gone in 2013, did a short stint at a16z and runs his own VC firm.
SAP took 8bn to buy more cloud business, which is less money it will take to move ERP customers from on-prem to cloud.
As MSFT is raking in cloud revenue, every other enterprise player is nervous about looking outdated. ORA stopped reporting cloud numbers altogether.
For comparison, ORA bought NetSuite for 9.3bn USD in 2016. Since then they have told NetSuite customers their user licenses prices will be raised by 5%, every year, for the next 5 years.
>As MSFT is raking in cloud revenue, every other enterprise player is nervous about looking outdated.
Too late, SAP looked outdated back in early 00's. I don't get why anyone still uses SAP, it performs like crap, is way, way, way more complex than needs to be, and costs a fortune.
I think there's a lot of misunderstanding here. Sure it's a large number but ultimately it's a testament to how Enterprises increasingly understand the criticality of customer satisfaction. In other words, Enterprises can be flying blind if they don't understand what's going on and it's actually very valuable to control the most popular platform used for understanding customers. Put another way, this is a little bit like Microsoft buying LinkedIn but instead of focused on the network of who works where it's focused on the network of Enterprise knowledge about their customers. Aka a key piece of CRM.
What the article points out as notable is the price.
I agree sap they probably have a reason why they want to buy this company, even at this price. But, the question is, why is the price so high? ...more about the market than the buyer's needs.
Even if you are willing to buy potatoes for £10/kg because of a special recipe, it still begs the question of why you had to.
I can't comprehend why companies in strong positions need to acquire the strongest company in a new category at a premium. I'd think they'd want to buy the 3rd or 4th ranked player in that category for a fraction of the price and then use their know how, clout and sales force to grab market share. That would be a win-win for themselves, the smaller company and customers.
I think this should be a good lesson to lots of entrepreneurs that there is a huge valuation to be had if you can find a "missing piece" that some other large company would be willing to (over)pay for.
It's also important to recognize that large corporate CEOs are incentivized to overpay for a deal. There is certainly more "glory" and bias to make big, splashy deals than the more mundane work of growing a business organically.
Tons of examples of fortunes that were made by getting some big sucker company to overpay: Yahoo -> broadcast.com, HP -> Autonomy, Time Warner -> AOL, etc.
There was an absolutely genius sarcastic comment in this thread that was posted by a throw-away and then deleted. I was going to reply to it, but saw it was deleted when I clicked to reply but was luckily able to copy it out of my cached version of the page. I'm going to reproduce it below, because it was hilarious:
The deal was 800 millions. Unfortunately, Alice, a local purchaser, made a mistake in the Purchase Requisition in ME51N.
After clicking on the "diskette" icon (or was it the "mountain"?), she noticed that she had written one zero too much (so 8 Billions). She immediately wanted to correct the error in ME52N (by clicking on the "pencil"). Unfortunately, her access to ME52N was revoked by the SAP Basis Authorization Team because the internal audit team wanted to improved "security" to respect the GDPR.
She tried to contact Bob from the SAP Basis Authorization Team, but he was on holiday. Charlie answered for him but told Alice that she had to introduce a ticket in Solution Manager to ask for an access to ME52N. She had no access to SolMan, so she had to ask her Super Key User to make a ticket for her. The list of Super Key Users was available on a SharePoint list on the company's intranet, but had not been updated for a long time. Eventually she found out that her SKU, David, was retired.
Fortunately her colleague Erika (a former SKU that moved from another division), had kept her access to SolMan and wrote the ticket for Alice.
In the meantime, the Purchase Requisition had been approved by Fernand (from Finance) in the Workflow. Gerard, a (bored) new recruit, immediately converted it to a Purchase Order with ME21N.
After a few weeks, Alice, who got access to ME52N, noticed that the PO had already been made by Gerard. She contacted him with Lync to inform him of the mistake. But the "Cancel" button for a PO was not working. During the User Acceptance Test, Gerard had noticed that Cancel did not work, but the consultants told him that he had to follow the scenario, otherwise they would tell his boss that he was "resistant to change" and that he had to sign off the UATs. (The bonus of the consultants was based on the number of successful UATs).
It escalated quickly. The Director wanted to stop the transaction! But it was needed an unexpected Change Request to make the Cancel button work. The CRs, like authorizations, must be asked via SolMan, but the Director was unable to use it because it did not work on his iPad Pro (but it will soon because Fiori will solve all the problems).
Eventually, as the CR was too complicated to implement, the purchase went through and SAP bought Qualtrix for $8B (but they still are unable to find the scanned invoice in VIM).
Posting this in the intranet as an employee of the company from the post header would get one fired. Such things, each of them, are literally happening in these kind of environments and everyone are absolutely serious about them.
The fact it's vaguely plausible to anyone who has ever used a SAP product is why it's so hilarious. If you're asserting this is not merely plausible but actually likely, that's scary rather than funny.
47 comments
[ 2.9 ms ] story [ 105 ms ] threadDennis Howlett knows a lot about SAP and wrote these early thoughts which I thought are on point. https://diginomica.com/2018/11/12/qualtrics-acquired-saps-hi...
This would be far from the first time that a bit of a dinosaur overpaid to try to buy their way into a market.
[1] https://www.qualtrics.com/uk/customers/
The new market, for SAP, would be academia.
Clearly at some level, the SAP sales force attacking on a new product provides unextracted value from an acquisition.
8 Billions worth on a survey company, seems far fetched, but maybe they do have intrinsic value that far exceeds those words, and match a need that customers want to fill.
There is a ton of economic pressure right now to "put money to work." Interest rates have been low for a long time and industry is, for the most part, cashed up already. This means prices get high.
There were obvious seeds sown internationally after the banking crash, but I think tech companies may have something to do with it too.
Think of Tesla, a car manufacturer, and how different that is from a Facebook or Amazon.
Musk had to sell all shares (holding onto voting rights) and raise as much debt as he could. Tesla is still capital constrained.
Meanwhile, Amazon, Google and even apple are headed towards $1trn valuations without cash problems at all.
These companies basically create massive book assets (and income streams) without requiring much capital, or being capital constrained.
The growth potential and the cash needs are just not in the same place. This part of the economy isn't growing out "investment." It's adding to the lake of corporate cash, but corporate cash doesn't isn't used to make or grow googles.
We saw the baby version of this when of was writing about founders starting to keep majority ownership.
John Van Reenen talks about this in this paper [1]. He has been looking into how and why the giant companies have been concentrating all power in their market : Amazon, Google,...
His hypothesis is that to become a giant company you used to need capital to buy the best factory and the best machines but that nowadays to become big you need to have the best version of intangible capital : proprietary software, users' data,...
Markets become winner takes all and this creates the rise of "superstar companies". To become a giant company you can't just dump money at the problem anymore to build, say, a new factory. The only way to dominate search is to have Google's tech along with users and the data they generate. To become a retail giant you invest heavily in logistics and inventory control management.
This has several consequences :
- You don't need to borrow mass amount of money to become big.
- Changing the interest rate doesn't have as big as an impact as before (if you don't need large amount of capital to grow big, making money more expensive won't prevent companies to grow big).
- wages inequality rise (the few workers that produce the intangible capital in the have high wage while wage become stagnant for the rest)
[1] Increasing Differences between firms: Market Power and the Macro-Economy http://mitsloan.mit.edu/shared/ods/documents/?DocumentID=504...
For example in beverages and fashion the capital needed for production is very limited, it's all about marketing and getting marketshare. Software is a mix where building is not as trivial, but it's for those big companies mostly about positioning and sales. Those industries are much more sensitive about ROI, it's not easy to find ways to spend you money in those areas.
Google/Apple/Facebook are just very profitable companies with in internal investment arm because they don't pay dividends or make huge buybacks, what a traditional company like CocaCola would do with those huge profits.
There are investment companies with hundreds of billions under management, so that's also nothing out of the ordinary. So the money is still invested, those companies don't have their billions on a bank account. Only this way those companies still have access and control over it, for acquisitions for example. Is that a good thing? Probably better than in some random fund owned by some individuals who are much more risk averse.
Tesla is another story, but from an outside perspective it's just very risky. They could've easily went bust if the Model 3 production went south, that's why it's tough for him to raise capital. Not many entities can gamble like that with billions, if it was a sure deal there would easily be enough capital available for Tesla. Look at the balance sheets of mayor car companies, for example Daimler has a quarter of a trillion in assets.
I don't think the difference between Tesla and most tech companies is just risk though. Tesla is definitely taking way more risk than "normal" but I think they are still getting a great price for equity. They're still trading at a nice multiple of revenue, especially considering debt.
I think there is a real difference in how the money works.
Tesla's equity was not, for the most part, poofed into existence by the market's expectations of future success. It was invested into the company. People wrote checks. Tesla built factories, made cars. The value of equity fluctuated and people made some market gains, but a substantial portion of the dollar value in Tesla right now was put there by investors.
Google or Facebook never needed money. They needed a market for their shares, but they didn't need to raise capital.
I think you're probably right about the narrow focus. More of the economy is more like FB and less like Tesla today.
If Tesla has more/less capital available, they can put it to work in the way whiteboard economics works. Increase capacity, produce more units, R&D... Facebook can't. Financial markets can affect its share price, but they really don't directly affect what FB can/will do.
My very long winded point is that the prevalence of fb-like companies makes money markets less reactive, and explain why prices are so high for assets. Big segments of the market can happily pocket increases in equity value, but they are supplier of capital, not consumers of capital like they're supposed to be.
Disagree here, working capital is the hardest thing by far for any company that 'makes stuff'. Inventory is very expensive. Shipping. Faulty units. Returns.
As for dividends ...
Dividends simply don't matter. Either you own the cash via stock ownership, or they return it to you. It's more a matter of how that capital can be put to work - who is better - Google, or you? Depends on the company there.
If you marry the two in an integrated way you cover the entire chain from "raw supplies in from this supplier through to customer not happy about quality of material from that supplier".
So while on it's own Qualtrics might not be worth 8bn to anyone else it might well be worth 8bn to SAP.
A company like SimilarWeb or Gartner might tell you whats really happening outside your business(ie market trends)
Seems they're trying to buy the customer feedback "experience management" angle to close the loop on their financial and ERP systems used to create and deliver products. It sounds nice in theory but these integrations rarely work and its doubtful most companies would use the whole suite or even use them together, even if offered by the same vendor.
SAP might be trying to reach into the "cloud" market by throwing cash, but I can't think of a single example where this has been a great success.
Lies, broken promises, tacky tactics. They will defend the "value-add" of their profession but it's a complete and utter joke.
I used to work sales at Oracle selling StorageTek libraries.
Google, Apple, Salesforce etc would just draft up POs themselves and send them straight for processing without ever talking to the sales guy about anything.
Thankfully I now work in support at a consumer heating oil delivery company and I feel like I'm infinitely more helpful and engaged in my work.
SAP took 8bn to buy more cloud business, which is less money it will take to move ERP customers from on-prem to cloud.
As MSFT is raking in cloud revenue, every other enterprise player is nervous about looking outdated. ORA stopped reporting cloud numbers altogether.
For comparison, ORA bought NetSuite for 9.3bn USD in 2016. Since then they have told NetSuite customers their user licenses prices will be raised by 5%, every year, for the next 5 years.
Expect Qualtrics to pull similar stunts.
> In 2011 SAP bought Successfactors, for 3.4bn.
And their stock price has more than doubled. What's your point?
Too late, SAP looked outdated back in early 00's. I don't get why anyone still uses SAP, it performs like crap, is way, way, way more complex than needs to be, and costs a fortune.
Because it is the least worst option for businesses who need what it offers.
And what is it offering exactly, relation database? Shit man, PostgeSQL, Maria DB, Firebird, etc.
I agree sap they probably have a reason why they want to buy this company, even at this price. But, the question is, why is the price so high? ...more about the market than the buyer's needs.
Even if you are willing to buy potatoes for £10/kg because of a special recipe, it still begs the question of why you had to.
It's also important to recognize that large corporate CEOs are incentivized to overpay for a deal. There is certainly more "glory" and bias to make big, splashy deals than the more mundane work of growing a business organically.
Tons of examples of fortunes that were made by getting some big sucker company to overpay: Yahoo -> broadcast.com, HP -> Autonomy, Time Warner -> AOL, etc.
The deal was 800 millions. Unfortunately, Alice, a local purchaser, made a mistake in the Purchase Requisition in ME51N.
After clicking on the "diskette" icon (or was it the "mountain"?), she noticed that she had written one zero too much (so 8 Billions). She immediately wanted to correct the error in ME52N (by clicking on the "pencil"). Unfortunately, her access to ME52N was revoked by the SAP Basis Authorization Team because the internal audit team wanted to improved "security" to respect the GDPR.
She tried to contact Bob from the SAP Basis Authorization Team, but he was on holiday. Charlie answered for him but told Alice that she had to introduce a ticket in Solution Manager to ask for an access to ME52N. She had no access to SolMan, so she had to ask her Super Key User to make a ticket for her. The list of Super Key Users was available on a SharePoint list on the company's intranet, but had not been updated for a long time. Eventually she found out that her SKU, David, was retired.
Fortunately her colleague Erika (a former SKU that moved from another division), had kept her access to SolMan and wrote the ticket for Alice.
In the meantime, the Purchase Requisition had been approved by Fernand (from Finance) in the Workflow. Gerard, a (bored) new recruit, immediately converted it to a Purchase Order with ME21N.
After a few weeks, Alice, who got access to ME52N, noticed that the PO had already been made by Gerard. She contacted him with Lync to inform him of the mistake. But the "Cancel" button for a PO was not working. During the User Acceptance Test, Gerard had noticed that Cancel did not work, but the consultants told him that he had to follow the scenario, otherwise they would tell his boss that he was "resistant to change" and that he had to sign off the UATs. (The bonus of the consultants was based on the number of successful UATs).
It escalated quickly. The Director wanted to stop the transaction! But it was needed an unexpected Change Request to make the Cancel button work. The CRs, like authorizations, must be asked via SolMan, but the Director was unable to use it because it did not work on his iPad Pro (but it will soon because Fiori will solve all the problems).
Eventually, as the CR was too complicated to implement, the purchase went through and SAP bought Qualtrix for $8B (but they still are unable to find the scanned invoice in VIM).