What Is Happening? On Saturday, December 3, 2011, SAP announced that it had entered into a definitive agreement to acquire SuccessFactors for $3.4 billion, a roughly 10X multiple to estimated calendar year 2011 revenues (and 8X estimated 2012 revenues). The acquisition is expected to be completed in 1Q2012, with the San Mateo, CA-based SuccessFactors to remain a separate entity, renamed “SuccessFactors, an SAP company.” Lars Dalgaard, the founder and CEO of SuccessFactors, will remain in charge at SuccessFactors, as well as taking on a broader role in leading SAP’s Cloud business.

Overall, this is a positive move for SAP customers, as the acquisition immediately makes SAP a leader in Cloud business solutions – with strong synergies in terms of target (large-enterprise) customer footprint. We view this acquisition not only as a means to give serious heft to SAPs Cloud intensions and plans, but to provide it with an infusion of fertile and experienced Cloud DNA, as well as leadership who truly understand what it means to be in a services business. No doubt, SAPs modest success to date in its Cloud business contributed to this move – as SAP is not alone among traditional ISVs, many of whom have been challenged to robustly transition their business, technology and operational models and culture to the Cloud.

On balance we think this will prove to be a smart acquisition that is yet another marker in the mainstreaming of the Cloud. Ultimately, we believe the success of this acquisition should be measured by whether it truly helps SAP transition beyond its strong product-centric culture – as it positions itself for success in a rapidly changing market.

Why Is It Happening? Instant Cloud Credibility and Significant Cross-Sell Opportunities. SuccessFactors brings SAP instant credibility as a serious, enterprise-class Cloud provider. While SAP has certainly enjoyed some success selling its LOB On Demand solutions (e.g., Sourcing, Sales, Carbon/Energy Mgmt) to large-enterprise clients, and its ByDesign application suite to SMB customers (and as part of a 2-tier application architecture for larger R/3 installations) – SuccessFactors immediately brings 3,500 customers and 15 million subscribers to the mix.

The SuccessFactors acquisition provides for significant cross-sell opportunities given SAP’s large-enterprise, on-premises footprint that currently includes more than 500 million employees within SAP customer enterprises – including up-selling to the 15,000 HCM deployments that SAP currently maintains. With HCM as the 2nd most popular “core” business application (after CRM) leading large enterprises into the Cloud, this acquisition will clearly position SAP to not only stem future defections (such as what happened when Siemens went to SuccessFactors in the first place), but to position it for significant upside opportunity in this important application sector. By SAPs own estimates, 80 percent of all new HCM deployments will be Cloud-based by 2015.

SuccessFactors had in recent years attempted to broaden its Cloud Business solutions portfolio beyond its Talent and performance management roots.  In 2010, the SuccessFactors acquired Inform Business Impact a provider of business analytics and workforce planning software, Software A/S (YouCalc), a provider of real-time analytics and reporting software, and CubeTree, Inc., a provider of social media and collaboration software – and most recently, Plateau Systems, a provider of on-premise and Cloud HR solutions. However, the fruit of these acquisitions are still on the tree, as SuccessFactors remains known primarily as a Cloud HCM company, despite attempting to reposition itself as a provider of tools for analytics, business success metrics, social media and collaboration.

Market Impact

While both companies have a significant number of small and mid-range customers, both are squarely large-enterprise focused, and in the short-run, SuccessFactors can easily fit into SAP’s LOB On Demand product mix as its heavy-weight HCM Cloud solution. While the analyst call that Saugatuck participated in on Saturday afternoon largely finessed the issue of technology integration between the two companies, the question longer term may not be how they will bring together their core Cloud product architectures – but rather how will these loosely coupled platforms enable composite solutions.

SAP has invested heavily in the ByDesign platform, which serves as the basis not only for its ByDesign application suite, but also for the majority of its’ LOB On Demand solutions (including the scheduled release of its emerging Talent On Demand offering previously planned for 2Q2012). While there is a lot to sort out, in the short- and mid-term, the good news is that there is a great deal of technology that can be shared such as SAPs in-memory database capabilities, as well as some interesting and powerful mobile and social technologies/capabilities that both firms have been investing in.

Whether this spells the end of the ByDesign investment as the core foundation of SAPs Cloud business, or the beginning of a new merged set of Cloud business solution capabilities – we are not likely to know until the dust has settled at year-end 2012. However, we would encourage SAP to set forth a fairly transparent Cloud business solutions roadmap for customers in the shorter-term, to avoid any significant disruption in business flow.

While both organizations have a history of acquiring and integrating other companies (e.g., SAP: Business Objects; SuccessFactors: Plateau Systems), both also have very strong company cultures that are rooted in R&D and “not invented here” mentalities. Both cultures pride themselves on creativity and internal innovation, which is a big reason for their success over the years. While the running of SuccessFactors as a separate SAP business unit will no doubt mitigate some of these challenges, the longer-term success of this expensive marriage will in many ways depend on how well Lars Dalgaard and the evolving leadership team at SAP can infuse the Cloud DNA of SuccessFactors throughout the firm.

As regards Cloud and IT markets as a whole, for several years now Saugatuck has been predicting that Master Brand ISVs will leverage acquisitions in the Cloud to help accelerate their ability to compete, and put them squarely on the map vis-à-vis Cloud. While the trend toward consolidation will not solely be the domain of the traditional on-premise ISV (just look at salesforce.com’s recent spending binge – Model Metrics, Radian6), clearly the traditional giants such as IBM (e.g., Cast Iron, Unica, CoreMetrics, Netezza) and Oracle (e.g., RightNow) are demonstrating that they plan to play, and play big, in the Cloud, and related markets.

What this also suggests is a scenario of the leading pure-play Cloud solution providers recognizing the need to beef themselves up as well – or they run the risk of potentially being swallowed by larger, well capitalized players in the hunt, such as Dell, HP, IBM, SAP, Oracle and Microsoft – and even brands such as Infor and Ariba slightly down the size stack. Firms that come to mind include NetSuite, Taleo and Concur – but there are probably more than a dozen who fit this profile. And this should no doubt help the IPO plans of Workday and Intacct, tentatively scheduled for later in 2012 – both of whom are experiencing exceptionally strong growth right now (at extremely different ends of the Cloud business solution market).

This blog originally appeared at Saugatuck Lens360.