Strategic Finance

SAP Shuns Hardware Deals to Propel Stock

Oracle rivalry leads SAP to innovate with software rather than use M&A, says CEO.

By Aaron Ricadela

SAP AG, the world’s top maker of business applications, will rely on software innovation rather than large acquisitions to vie with Oracle Corp. in the $2 trillion global corporate technology market.

“We’ve made the decision to innovate the future, not consolidate the past,” said co-Chief Executive Officer Bill McDermott, in an interview today. “I don’t see where hardware is going to give us an advantage.”

While Oracle, International Business Machines Corp. and Hewlett-Packard Co. have used acquisitions to become one-stop shops for corporate hardware and software, SAP has focused on getting products out the door more quickly and used deals to expand in data-analysis and applications for smartphones and other portable devices.

Since McDermott and co-CEO Jim Hagemann Snabe took the helm of Walldorf, Germany-based SAP in February 2010, the shares have climbed 12 percent even as the European debt crisis curtailed spending in that region. Oracle surged 24 percent over that period, with a 33 percent sales gain in the last fiscal year, showing investor confidence in efforts by CEO Larry Ellison to expand revenue through acquisitions.

SAP’s sales rose 17 percent last year as McDermott and Snabe steered into areas including software for mobile devices such as Apple Inc.’s iPad. New data analysis software called Hana lets customers quickly analyze large amounts of sales and operational information.

‘Stock is Low’

“We agree that the stock is low, that’s why we bought it,” McDermott said, referring to executive share purchases. “We’re not worried about the short term reaction of the market.”

SAP will meet its 2015 sales forecast of 20 billion euros ($27.3 billion) even amid the debt crisis in Europe, McDermott and Snabe said. That tops the average 18.5 billion euro estimate of analysts surveyed by Bloomberg.

“What does it mean for our business? Not so much so far,” Snabe said of the economic situation in Europe. “The countries that are in trouble are very small in our global portfolio.”

Global spending on information technology by companies and governments will reach $2.15 trillion next year, up 18 percent from 2010, according to a Sept. 16 report from Forrester Research Inc.

Twice Oracle’s Share

SAP controls 25.3 percent of the $21.2 billion market for business-management software, more than twice Oracle’s share, according to market researcher Gartner Inc. Siemens AG, Exxon Mobil Corp. and Wal-Mart Stores Inc. are among about 180,000 companies that use its applications to order goods, plan inventory levels and manage sales.

Now, SAP is trying to sell them on mobile software gained through last year’s $5.8 billion acquisition of Sybase Inc. and the Hana software, which lets companies analyze data in a computer’s memory instead of through slower disk drives.

If Hana “really gets traction in the market,” it can help SAP boost software license sales by as much as 20 percent between 2013 and 2015, said Knut Woller, a technology analyst at UniCredit Research in Munich.

Even with the new offerings, SAP must convince its customers not to switch to products from rivals, including Oracle and IBM, which sell combinations of hardware and software designed to speed and simplify computing with solutions.

Tailored Software

SAP’s pitch: Software tailored for specific industries that’s compatible with any device companies may use makes a single vendor for hardware and applications unnecessary.

Originally published on www.bloomberg.com. Reprinted with permission from Bloomberg News. Story copyright 2014 Bloomberg News communications. All rights reserved.