November 16, 2018 / 9:16 AM / a month ago

SAP defends $8 billion Qualtrics deal

BARCELONA (Reuters) - Germany’s SAP hit back at suggestions that the German business software group is paying too much for Qualtrics, a U.S. company that specialises in tracking consumer sentiment online.

SAP SE CFO Luka Mucic attends the company's annual results press conference in Walldorf, Germany, January 24, 2017. REUTERS/Ralph Orlowski/Files

The $8 billion deal announced on Monday was SAP’s biggest in four years and came as a surprise to investors, who had been told to expect smaller bolt-on acquisitions, and sent its share price down 6 percent.

SAP finance chief Luka Mucic said on Friday that the deal came together in only four weeks but SAP’s leadership examined it seriously and quickly concluded it was a good fit.

“Despite all of the reservations and debate ... (our analysis) yielded more and more favourable results,” Mucic told the Morgan Stanley European Technology, Media and Telecoms Conference in Barcelona.

SAP bought Qualtrics on the eve of the U.S. company’s planned stock market listing, which had been heavily oversubscribed and would have valued the business at about $6 billion.

Taking into account a likely run-up in the first days of trading, the price tag paid by SAP was attractive, Mucic said, adding that Qualtrics is a highly efficient platform with incredibly broad application.

“You don’t find that very often in a company that is scaling the way they are,” he said.

GROWTH EXPECTATIONS

Qualtrics, founded by CEO Ryan Smith in his parents’ garage 16 years ago, expects revenue to exceed $400 million this year with annual revenue growth above 40 percent over the next few years.

SAP, Europe’s most valuable tech company, will be able to scale growth and profitability quickly at Qualtrics by cranking up its sales organisation outside the United States, Mucic said.

Mucic also sought to allay concerns that a focus on cloud-based enterprise software applications would dilute profits from SAP’s cash-cow legacy business of software licences and support.

The priority is to grow SAP’s healthy businesses and improve their efficiency, and improved profitability based on the overall product mix will follow naturally.

“We would make a big strategic mistake throttling down our cloud growth just to make our mixed margin work,” he said, adding that improvements in margins will be incremental and not resemble the steep line of a ‘hockey stick’ chart.

Any future acquisitions are likely to be small, with SAP looking at areas such as artificial intelligence or robotics to round out its portfolio.

The company expects 2019 capital expenditure to be flat nd revenue from its software licence business to decline at low single-digit rates.

SAP will issue 2019 guidance with fourth-quarter results and update it when the Qualtrics deal closes early next year.

Reporting by Douglas Busvine; Editing by Michelle Martin and David Goodman

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