What is Happening? Less than a week after laying out and demonstrating commitment to its comprehensive, Cloud-centric business and technology strategy at its Sapphire user event, SAP AG announced that it has agreed to buy collaborative commerce platform provider Ariba Inc. for $4.3 billion – about $45 per share of Ariba’s outstanding stock.

According to the company, Ariba's global trading platform connects and automates more than $319 billion in commercial transactions between some 730,000 companies. Ariba reported $444 million revenue for fiscal 2011, a 39 percent increase over fiscal 2010. Estimates from leading Wall Street analysts such as Jason Maynard of Wells Fargo Securities pegged fiscal 2012 and 2013 revenues at $532 million and $608 million respectively, prior to the announcement. This implies that SAP is paying approximately 8x estimated forward fiscal 2012 revenue for Ariba. In comparison, SAP paid approximately 7.5x estimated forward fiscal 2012 revenue for SuccessFactors.

SAP has stated that Ariba's board of directors has unanimously approved the acquisition, which SAP will fund using a combination of cash on hand and a 2.4 billion-euro/ $3.06 billion commercial term loan program.

Why is it Happening? 

Global Cloud business application adoption growth. Cloud solutions are steadily growing to the point where the entire enterprise ecosystem of providers and buyers can see the hand writing on the wall. As we have previously stated, Saugatuck believes that by 2016, 75 percent or more of NEW enterprise IT spend will be Cloud-based or Hybrid. This is an additional huge indicator of SAP’s seriousness regarding Cloud as core to its business.

Cloud first. As noted last week in two complimentary Lens 360 blog posts (“Sapphire 2012: SAP Betting the Ranch on the Cloud” and “Sapphire 2012: Six Key Takeaways”), SAP needs Cloud to succeed. Buying one of the top two Cloud providers (in terms of revenue) helps SAP help itself.

Excellent fit with SAP’s emerging “Suppliers” Cloud business management portfolio strategy. SAP is building out four core lines of business software as part of its core Cloud positioning: Customers (CRM), People (HCM), Money (Financial) and Suppliers (Procurement/Network). Buying SuccessFactors brings SAP a leading Cloud provider in the People category; buying Ariba brings them a leading provider in the Supplier category. SAP has a long heritage in the Money category, and will continue to flesh out its offerings in the Customer category.

Reaffirmation of loosely-coupled architecture as core to its future. As we noted in the blog posts above, the move toward “an API-driven and loosely-coupled architecture ... [is now] ... central to its approach, with a focus on the value that the solution brings to customers, “not the underlying platform SDK (as SAP has many).” In this scenario, SAP believes that “what is critical is that [it] delivers a consistent (consumer-grade) user interface and user experience.”

External focus/excellent fit with SAP’s nascent “business network” positioning. Interactive, intertwined business transactions, interactions and relationships between enterprises are key to SAP’s vision of the future of business processes and operations – and business IT’s role. If SAP can extend and expand its management role and presence beyond enterprise walls into and through other enterprises, this will significantly grow company revenues and power.

Competitive pressures. While Oracle Corp. is widely regarded by some as being anti-Cloud, the reality is that the firm has made massive investments in developing, architecting, and migrating Cloud-based offerings for its total portfolio. Despite market and media perceptions otherwise, Oracle leadership knows that Cloud is key to the long-term IT and business future. Although Oracle is only now beginning to come to market with the breadth and depth of Cloud-focused business that IBM and SAP already exhibit (and, to a lesser extent, Microsoft and HP), Oracle does have cash, revenue streams, developer ecosystems, and a partner ecosystem to make Cloud happen to the extent it sees the need. However, the Ariba acquisition again outflanks Oracle, and throws a long shadow over Infor’s evolved business strategy – and will make it that much harder for NetSuite to move up market into the large enterprise segment. 

For an extended version of this Research Alert, visit Saugatuck Technology.

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