SAP agrees $4.3bn deal for Ariba

SAP to target Salesforce and Workday, according to leaked memo

SAP is to buy collaborative commerce software and cloud-service provider Ariba in a deal valuing the company at $4.3bn (2.7bn). The deal is part of SAP's belated attempt to expand its presence in the cloud after a decade in which cloud specialists, such as Salesforce.com, Workday and NetSuite, have established themselves as rivals in enterprise software.

The Ariba acquisition follows the December 2011, $3.4bn (£2.16bn) purchase of SuccessFactors, whose CEO, Lars Dalgaard, now heads up SAP's cloud division.

In a leaked memo, Dalgaard identifies Salesforce.com and Workday, the human resources cloud services company founded by Dave Duffield, as the two cloud companies "most likely to hurt SAP's customer base" and outlines a strategy intended to make SAP the number one cloud services company by 2015, measured in terms of applications offered and total sales volumes.

Dalgaard has established two dedicated sales teams to target these two companies with specially crafted suites of cloud software packages. These will combine human resources software with finance to take on Workday; and customer relationship management (CRM), procurement, SAP Business ByDesign and Social Customer Engagement onDemand to take on Salesforce.com.

"We need less products and [to] focus more of our great people, from development to sales and customer support, on fewer products that can compete now and sell now. We need to do [more] to make SAP credible, then we can become relevant and competitive in the cloud. Then we can accelerate pipeline and then excite customers, close a lot of business, then implement it in weeks, not months," wrote Dalgaard in the memo.

Part of Dalgaard's strategy has involved migrating SAP's internal systems to SuccessFactors' infrastructure, replacing solutions from Salesforce, Concur, RightNow, Netsuite, OpenAir, Coupa, Avalara and Onbase in the process.

SAP agrees $4.3bn deal for Ariba

SAP to target Salesforce and Workday, according to leaked memo

Dalgaard intends to focus SAP's cloud development efforts on four main target markets, with the aim of offering "loosely coupled suites of standalone, best-in-class cloud products that always work with all of SAP's on-premise products". He calls these suites:

* My People for human resources;
* My Money for finance;
* My Customers for customer relationship management; and,
* My Vendors for procurement.

He added: "Most people won't buy a total cloud suite yet, but they will buy multiple products, loosely coupled together, especially in the enterprise. Often, we won't be able to predict how they will buy them and we often see them buy combinations of products we would not expect. [So] we must provide an integrated menu of business streams that allow our customers to choose the solutions that work within their environments and, in addition, experience a consistent user experience and process integrity."

Dalgaard's memo also highlights how poorly SAP OnDemand, SAP's in-house developed cloud effort, has been performing, revealing its operating margin of -64 per cent compared to SuccessFactors' own +83 per cent operating margin. In other words, SAP's cloud costs currently far outstrip revenues.

Analysts and other observers gave the Ariba deal the thumbs up.

"This acquisition is less about Ariba's global trading network than a ‘talent grab' about the business issues of cloud computing and technical insights on developing applications for the cloud," said Ovum analyst Cater Lusher, Research Fellow & Chief Analyst.

He added: "This is a logical step for SAP as it needs to accelerate its move into the cloud. This acquisition is consistent with SAP's overall merger and acquisition strategy and complements the SuccessFactors acquisition in December – providing greater depth of products, executives, and tech talent for the cloud.

"For Ariba, it's unlikely the talent, technology and product will be cut. Instead, I expect SAP will invest heavily in Ariba's research and development. While there is no immediate impact on SAP's competitors, there could be a need for concern should SAP successfully accelerate its move into the cloud," said Lusher.

The acquisition is part of a race for services and customers in cloud computing between SAP and rival Oracle. However, the deal will almost certainly spark a response from Oracle, given that many of Ariba's customers also use Oracle. Furthermore, SAP has also been targeting Oracle in terms of both its enterprise applications software, as well as its database software with SAP HANA and the Sybase software it acquired in 2010.

The deal comes just two weeks before Oracle CEO Larry Ellison announces Oracle's own cloud software strategy on 6 June.

The Ariba network automates more than $319bon (£200bn) in electronic transactions among 730,000 companies, according to SAP. In the year to the end of September 2011, Ariba posted revenues of $444m (£282m).

Ariba was originally an on-premise provider of e-commerce software during the dot-com boom of the late-1990s. It floated on the Nasdaq stock exchange in 1999 and, at the height of the bubble, was valued at more than $40bn (£25.4bn).