Why SAP bought SuccessFactors

December 5, 2011: 11:29 AM ET

The business software giant is shelling out $3.4 billion to buy its way further into the cloud.

FORTUNE -- Over the weekend, SAP announced the $3.4 billion acquisition of human resources management software provider SuccessFactors -- big news by any measure.

The first question (besides why SAP (SAP) chose Saturday morning for the announcement) is whether or not shelling out so much money to buy its way into the cloud makes sense?

SAP's purchase of SuccessFactors was a 52% premium to Friday's closing stock price. But San Mateo, Calif.-based SuccessFactors is valuable -- it's a growing player in a growing market for cloud-based software. The company says it has more than 3,500 customers across 168 countries, and recorded 77% revenue growth year-over-year in the third quarter of 2011. SAP, meanwhile, is the 800-pound gorilla in business software, but not in cloud computing. And while it's making attempts to grow its cloud-based offerings organically as well, it can't afford to miss the opportunity to buy its way into the market simultaneously.

Why? It's now become evident to SAP (and its competitors) that software delivered over the web is not just a passing fad for cash-strapped small businesses. In October, rival Oracle (ORCL) bought another cloud-based software company, RightNow Technologies, for $1.5 billion. And the trend of larger software companies buying their way into the software-as-a-service market won't end anytime soon. There are still quite a few promising acquisition targets out there such as Pleasanton, Calif.-based Workday and plenty of appetite to eat them up.

In the past, SAP wasn't so big on acquisitions. But this is a new era at SAP, where its two newish CEOs Bill McDermott and Jim Hagemann Snabe, are taking bolder steps to get the company into social, mobile and the cloud. "The cloud is a core of SAP's future growth, and the combination of SuccessFactors' leadership team and technology with SAP will create a cloud powerhouse," co-CEO McDermott said in a press release issued on Saturday. "The acquisition will help us address the top priority for CEOs globally – managing people and talent."

In an interview with FORTUNE on Monday, McDermott added that while SAP is unlikely to make any additional, large-scale cloud acquisitions in the near future, the price was just right for SuccessFactors.

"What we try to do is buy 'crown jewel assets' that have attributes that either on their own right or in combination with SAP allow us to lead in a category," McDermott said. "In the case of SuccessFactors it was a one of a kind asset."

Of course, some analysts aren't convinced the strategy -- and the price SAP is paying -- will work. "If SAP's strategic intention with this deal is to sell SaaS into the enterprise, we think the reality in the field will be very different," Peter Goldmacher, a senior research analyst with Cowen and Company, wrote in a note on Monday morning. "It's hard to imagine the company's enterprise sales force successfully delivering a message to its customers when to use on prem [on premise] and when to use SaaS, much less an SAP sales rep selling SFSF [SuccessFactors] for a fraction of what SAP's HR modules sell for."

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About This Author
Michal Lev-Ram
Michal Lev-Ram
Writer, Fortune

Based in Silicon Valley, Michal Lev-Ram covers enterprise and mobile technologies for FORTUNE. Prior to joining FORTUNE, she wrote for CNNMoney, Fast Company, Popular Science and other business and technology publications. She was also a staff writer at Business 2.0 and holds a B.A. in journalism from San Francisco State University.

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