SmoothSpan Blog

Interesting move in the consolidation game:  SAP is acquiring Business Objects for $6.8 billion.  As I look at the financials for BOBJ this Sunday, it looks like SAP is offering a 20% premium on a company that was going to miss its earnings number.  This is quite generous, and indicates they wanted the deal pretty badly.  They’re also paying a greater multiple on revenue than Oracle had paid for Hyperion last March. 

Why was SAP so eager for the deal?  It’s certainly one way to grow and add valuable recurring revenue in the form of the maintenance revenue associated with a large entity like Business Objects.  According to their last 10Q, these maintenance revenues were in the neighborhood of almost $150M/quarter.  It also gives them something new to take back into their installed base in order to try to extract more revenue with another module.  My guess is Oracle was coming on strong with Hyperion, which is an excellent product, and it was putting pressure on SAP’s in-house product.

The one troubling thing for me about this acquisition is that SAP does not have a strong acquisition culture.  That’s not to say they can’t do it, but acquisitions are hard.  It’s very difficult to do one without destroying a lot of the value there.  We’ll have to watch and see how SAP does with BOBJ.

Where does that leave the rest of the BI gang?  In an interesting lurch I would guess.  When you look at the breadth of Enterprise Solutions either SAP or Oracle can muster, as well as just how much data they are the systems of record for, it seems like the other vendors will find it challenging to horn in on BI opportunities where SAP and Oracle are strong.  Suddenly, they seem much less valuable.  Perhaps not.  We’ll see what the markets say about the likes of Cognos tomorrow morning.

One alternative for firms like Cognos is to try to focus more on partnering with Enterprise software companies other than SAP and Oracle.  There are many levels of partnering possible.  These two deals mean two less technology bases to OEM into other products for BI purposes.  BOBJ, in particular, had an excellent OEM’able technology in Crystal Reports.  Companies that had partnered with either player on this basis likely need to rethink that strategy and get connected with an independent.  Of course, this is challenging when musical acquisition chairs are playing.  It takes a considerable investment to build a solution with an OEM partner.  Wouldn’t it be terrible to just be finishing one up only to hear your OEM partner is being acquired by an unfriendly big company?

The other interesting dynamic is the remaining BI players will have to think twice about partnering with either Oracle or SAP.  It will be interesting to see how much of their market that cuts into.  There will be a lot of chaotic meetings going on first thing Monday to try to sort out what to do about all this.

Here is another thought:  Business Intelligence is a technology that many SaaS vendors prefer to be able to OEM from some source for the simple reason that shipping huge volumes of data to the BI tool can be prohibitive.  Hence they’d like to be able to put the BI tool at the same end as the database resides.  It’s certainly not impossible for the two to be in separate data center.  Lucid Era is a promising SaaS BI startup aimed exactly at that mechanism.  It will be interesting to see whether SaaS players who want BI find themselves pushed into partnering with LucidEra and the like, or whether they hook up with some of the remaining BI vendors.

There is a dark horse out there: open source.  I’ve looked into several of these solutions.  By and large they’re not up to snuff compared to the big boys.  One OEM technology that used to exist and was withdrawn from the market was Informatica’s Power Analyzer.  It’s a new generation tool compared to the big boys, but Informatica was never able to invest enough in it to reach critical mass.  Nevertheless, it beats the BI tools that are available open source today.  I’ve always thought Informatica should have open sourced Power Analyzer.  That would shake things up again.

We’ll continue to see the M&A game play out for software.  The economic forces driving it are strong.  SaaS is eating many companies from the bottom up, while at the same time the disruptive nature of the SaaS model prevents them meeting the challenge head on.  There are significant economies of scale that let the bigger software companies succeed more easily than the smaller ones.  And, the big ones need to acquire to gain new feedstock.

Who will fall next?

Update:

Cognos has soared almost 10% the first trading morning after the announcement.  Looks like the expectation is they’ll be the next ones picked up.  ZDNet’s Larry Dignan says they’d make a good one for Oracle.  Not clear how Cognos can stay independent.