SAP Needs to Get Into the M&A Game ... Fast

Enterprise resource planning software is a massive global business. Then again, it deals with the core functions of a company: payroll, compliance, inventory, sales, logistics and so on. By far, the dominant player is SAP (SAP), which has built its ERP business into a cash cow.But over the past couple years, the company has stumbled. True, the recession has made it more difficult to get customers to shell out big sums for software licenses. But SAP also rankled its customer base with proposed price increases -- which are never appreciated during economic hard times -- as well as product delays, meager innovations and sluggish revenue growth. On top of all this, SAP is facing increased competition from the likes of Oracle (ORCL) and Microsoft (MSFT).

Recognizing its problems, SAP has not renewed the contract of CEO Léo Apotheker, and has instead brought in co-CEOs, Bill McDermott (the former field organization chief) and Jim Hagemann Snabe (the former product development chief). For a conservative company, this is definitely a big-time move. Bear in mind that SAP only named Apotheker the sole CEO in July.

While this leadership shake-up is a good first step, SAP needs to do much more: Specifically, it must ramp up its mergers & acquisitions efforts. M&A's have worked wonders at Oracle. Why not at SAP?

The SAP Way: Incremental Change and a Go-It-Alone Ethos

SAP likes to trumpet its global development approach: The German company's network of labs includes sites as diverse as Bulgaria, Canada, China, Hungary, India, Israel and the U.S.

But this scale may be a disadvantage. Often, it's the smaller, nimbler organizations that bring out the best innovations.

SAP has been strong at making incremental changes to existing products. And this makes sense -- it's critical to protect those gushing cash flows. But over time, the strategy fails. The fact is, software is undergoing a disruptive change: the cloud computing revolution. By leveraging the Internet, companies can deliver technology more easily and cheaply, and customized for their clients.

SAP has poured lots of time and money into its cloud offering, Business ByDesign. But consider that the offering is three years late and is not expected to hit the market until mid 2010.

SAP's go-it-alone strategy is in stark contrast to Oracle's approach. Oracle CEO and founder Larry Ellison believes that it is smarter to buy innovative companies. That allows it to get products to market more quickly and tends to lower the risks. Over the past five years, Oracle's market value has roughly doubled to $117 billion. SAP, on the other hand, has seen its value stay at about $51 billion.

Getting Its Head Into The Cloud

Simply put, SAP needs an M&A strategy which is fairly clear to investors, customers and the tech industry. So far, its vision appears muddled.

One method would be to mimic Oracle's approach, which is clearly stated on the company's website: "Oracle seeks to strengthen its product offerings, accelerate innovation, meet customer demand more rapidly, and expand partner opportunities. An integral part of Oracle's Mergers and Acquisitions philosophy is our consistent commitment to customer service and product support while achieving our financial return objectives and creating value for our shareholders."

Taking this as a guide, SAP could look at traditional players it could acquire to bulk up its customer base, such as Software AG, Lawson Software (LWSN) and CDC Software (CDCS). There are also a variety of cloud operators that could help accelerate SAP's technology platform as well as bring new thinking. Some of the standout companies include RightNow (RNOW), SuccessFactors (SFSF) and NetSuite (N).

Of these, NetSuite is perhaps the most interesting. A pioneer in cloud computing, the company now has a full-blown ERP suite. In fact, NetSuite even has a program to convert SAP customers to its products, and it's getting some traction.

However, the key is that SAP needs to get aggressive again and come up with an actionable strategy. If not, the company will probably continue to muddle about and miss the next big growth opportunities in software.
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