Sunday, May 16, 2010

Acquisition is not simple: SAP-Sybase acquisition agreement

On May 14th SAP AG signed a definitive agreement to acquire Sybase Inc. for approximately $5,800 million. The offer price represents a premium of 44% over the three-month average stock price of Sybase and a premium of approximately 56.36% over the closing price of Sybase' common stock of $41.57 on May 11, According to the announcements by the two companies the deal, which follows a partnership for a significant time, is beneficial for both companies. I partially agree: It is very good for Sybase. However, I think that acquiring Sybase looks like a SAP's mistake.

What motivated SAP to acquire Sybase?
Previous SAP's CEO LEO Apotheker was replaced by Bill McDermott and Jim Hagemann Snabe due to conservative business approach. One of the significant results of this approach is few acquisitions. SAP's main competitor Oracle, is acquiring many companies in a relatively short time. So far SAP's significant acquisition was Business Objects a Business Intelligence infrastructure software provider, while oracle acquired ERP and CRM companies like PeopleSoft and Seibel, Infrastructure software leader BEA (Oracle's BEA Acquisition SOA perspective Revisited again), Infrastructure Hardware and Software vendor Sun (Vendors Survival: The Sun is red - Oracle to buy Sun First Take) and other applications and infrastructure vendor such as Hyperion and Golden Gate (The Golden Gate).

The new co-CEOs have to adopt a dynamic acquisition based policy. An acquisition of a large vendor like Sybase is a clear manifestation of a new policy.

Another major reason for Sybase's acquisition is Sybase's leading Mobile products.
Mobile infrastructure and applications as a significant part of Enterprise Architecture is a major IT trend. In order to compete in that segment SAP needs to integrate Mobile solutions to its Applications and Infrastructure. The partnership with Sybase marks it as a good candidate with leading Mobile products.

The third reason is Sybase's presence in the Financial vertical as an Infrastructure and Analytic solutions provider.

Sybase's history
In the middle of the 1990s Sybase was one of the four leaders of the Relational Databases Market together with Oracle, Informix and Ingress (Informix was acquired by IBM and Ingress was acquired many years ago by CA but even CA failed in bringing it back to the Short List of RDBMS leaders). Sybase competed directly with market leader Oracle.
Usually Oracle advocated Central Database model while Sybase favored Distributed model.
One byproduct of the Distributed model was a leading Middleware solution. However, Sybase failed to deliver in the J2EE Application Servers market in 2000-2001 and is no longer a Middleware market leader.
As far as the DBMS market is concerned, Sybase partnered with a giant named Microsoft, which did not developed yet an RDBMS solution. Sybase SQL RDBMS was branded by Microsoft as Microsoft SQL Server. When the partnership failed, Microsoft was a legitimate player in the Enterprise RDBMS market. Few years latter there were only three leaders in the RDBMS market: Oracle, IBM and Microsoft. The fourth significant player is Open Source DBMS MySQL. No one consider Sybase as viable option for a new Enterprise DBMS, however its Installed Base continue to use it.

In order to compete with Oracle's development Suite (RDBMS+ IDE), Sybase acquired PowerSoft. PowerSoft's  flagship product was Fat Client/Server market leader PowerBuilder.
PowerBuilder was an excellent development tool for small environments (e.g. 10 to 50 users) but limited by design for large Enterprise applications (e.g. thousands of users).
Again Microsoft's product became a competitor: Visual Basic was designed for the same market and soon became the leader of Workgroup Client/Server Application Development market, despite the technical superiority of PowerBuilder.
After the emergence of JEE and .Net development environments Power Builder is no longer a significant player in the Applications Development market.
PowerSoft acquires an excellent small footprint database named Watcom SQL prior to being acquired by Sybase.

With no ability to compete with giants like Oracle, IBM and Microsoft in the Enterprise DBMS market, vendors like Sybase and Progress looked for niches.
Watcom SQL's name was changed to Sybase SQL Anywhere and it became Sybase's Database for Mobile and Embedded environments.

Why acquiring Sybase is not great idea?
Buying an Applications vendor is usually better than buying an Infrastructure vendor.
A company profits from selling Applications are usually higher than profits from selling infrastructure solutions. That is why Oracle acquired PeopleSoft and Siebel before it acquired infrastructure vendors like BEA
We should remember that SAP is an Applications vendor and not an Infrastructure vendor, so assimilating an infrastructure vendor is quiet a difficult task for it.
It is true that SAP portfolio includes strategic infrastructure products, mainly Netweaver Middleware, and that the company created the term Applistructure, but the focus on SAP's infrastructure was few years ago in Shai  Agassi days.

The price is too high
Does Sybase worth about 45% or 50% more than its stock price?
My answer to this question is: Definitely not. It is not a brand new high rate growing company, but rather a veteran company. 

Will Sybase acquisition change SAP's infrastructure neutrality?
SAP Applications advantage over Oracle Applications is platform neutrality. It is possible to run SAP's ERP under any of the three leading databases: Oracle, DB2 and SQL Server. It can be executed under UNIX, Windows, Linux and even under IBM's Mainframe Operating Systems.  
SAP ERP and Microsoft's Office applications interfaces were build by cooperation of SAP and Microsoft. 
Will SAP continue its platform neutrality or prefer Sybase's Database or other platform component over external solutions? Probably it is not a good idea, but it may add Sybase's platform as additional option for ERP deployment.    

Will SAP kill or keep Sybase's non-Mobile product portfolio?
 If   Sybase platform will not be an ERP deployment option, than the question above is a valid question. Killing products implies losing maintenance revenues and firing Sybase employees. The other alternative is also not an attractive option: maintaining gradually declining software products.  

Which type of company I would acquire if I were SAP's CEO?
 The acquisition target should be a smaller applications company and not a large infrastructure company. A successful SaaS applications company could be an adequate target. It is relatively small, it is a player in a growing market and it may provide a better opportunity for entering into the SaaS applications market for SMBs than using SAP Business By design. 


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