SAP’s $8bn acquisition of Qualtrics

By Niclas Hallberg, Harvey George, Samuli Karjalainen and Ikjyot Anand (LSE) 12/12/2018 |

Overview of the deal

  • Acquirer: SAP SE

  • Target: Qualtrics International Inc.

  • Estimated value: $8bn

  • Announcement date: 11th November 2018

  • Acquirer Advisor: JPMorgan Chase & Co

  • Target Advisor: Qatalyst Partners

In the midst of Qualtrics’ IPO roadshow, SAP, Europe’s largest software company, announced they will pay an $8bn cash consideration to acquire the US experience management company, after having secured €7bn in financing. The surprising pricetag of $8bn represents an almost 100% premium to the valuation Qualtrics would have achieved at IPO, and it is over three times the $2.5bn valuation the company achieved during its 2017 funding round.


The deal follows the expansion of SAP and other Enterprise Resource Planning (ERP) companies of their software suites from providing core financial management to packages encompassing manufacturing, sales and customer relations management (CRM). Through the acquisition of Qualtrics, SAP will be able to include experience management software alongside its operational management products to provide businesses with end-to-end software solutions for all their data management needs.


The deal has been approved by both companies’ boards of directors and Qualtrics’ shareholders and is expected to close in the first half of 2019. Under the terms of the deal, Ryan Smith, Qualtrics’ CEO, will continue to lead Qualtrics as it operates as an entity within SAP’s Cloud Business Group.

“We continually seek out transformational opportunities – today’s announcement is exactly that. Together, SAP and Qualtrics represent a new paradigm, similar to market-making shifts in personal operating systems, smart devices and social networks” -Bill McDermott, CEO of SAP

Company details (SAP SE)

SAP SE (NYSE:SAP) is a German-based multinational software corporation which provides enterprise application software to businesses to manage core business operations. SAP also offer analytics and business intelligence solutions.

- Founded in 1972, headquarters: Walldorf, Germany

- President and CEO: Bill McDermott

- Number of employees: 94,989

- Market Cap: $120.9bn - EV: $128.4bn

- LTM Revenue: $28.1bn - LTM EBITDA: $7.3bn

- LTM EV/Revenue: 4.6x - LTM EV/EBITDA: 17.7x


Company details (Qualtrics International Inc.)

Qualtrics International Inc. is a US-based experience management company which provides Software-as-a-Service (SaaS) for collecting and analysing data on customer, employee, brand and product experience.

- Founded in 2002, co-headquarters: Provo and Seattle, US

- President and CEO: Ryan Smith

- Number of employees: 1,700

- Market Cap: N/A - EV: N/A

- LTM Revenue: $372M - LTM EBIT: $7.44M

- LTM EV/Revenue: N/A - LTM EV/EBIT: N/A


Projections and assumptions

Short-term consequences

Customer retention has been a growing focus for SAP’s clients, which is unsurprisingly when we consider that, per Bain and Company, a 5% increase in customer retention can increase profits by 25-95%. Currently, SAP offers the ability to track consumer engagement metrics but does not provide insights as to why customers behave in such a way, however, through Qualtrics’ experience management (XM) platform, SAP will be able to provide insights to understand reasons behind consumer behaviour - the key to increasing customer retention. From this there is significant opportunity for the creation of revenue synergies through the cross-selling of Qualtrics’ scalable cloud-based XM platform, which complements SAP’s current services, to SAP’s 413,000 existing clients.


Naturally, SAP aims to leverage its existing infrastructure to support Qualtrics’ expansion, a key consideration is the geographical diversification of Qualtrics’ client base. Indeed, as 78% of Qualtrics’ revenue comes from clients based in the US, SAP’s global customer network in 192 countries provides the necessary network to reach ambitious financial targets for Qualtrics. In the year ending 2018 Qualtrics expects to generate a turnover exceeding $400 million - up from its revenues of $290 million and $191 million in 2017 and 2016, respectively. With a forward growth rate of over 40%, excluding potential synergies, Qualtrics certainly looks to have the ingredients for significant top and bottom-line growth.

Long-term upsides

SAP has historically used acquisitions to transform its business, Qualtrics is no exception. Indeed, during the last 18 months SAP has acquired 5 companies that have expanded or established SAP product offerings such as human capital management and sales performance management solutions. The acquisition of Qualtrics is more notable however, the transaction stands afield because it is a major strategic step for SAP. The deal transforms SAP into an end-to-end data management company, enabling SAP to provide its clients with a comprehensive data management platform covering areas of the both operational and experience data. The move comes amidst further preference shown by SAP customers to have their entire data management needs supported by one platform, per Mr McDermott. The integration of Qualtrics’ XM platform makes SAP dominate over ‘Operational Data’ and ‘Experience Data’, the two pillars of firms’ data management needs.


Activity in the data management industry reflects this progressive development in clients’ product needs. Indeed, earlier this year Salesforce, another large provider of data management software, completed its $6.5bn acquisition of MuleSoft, a designer and developer of a software integration platform, in an effort to extend its data management services to an end-to-end basis. The acquisition of Qualtrics falls against these movements in the industry and begs the question: Will Qualtrics provide a competitive advantage for SAPs product offerings while competitors also move to improve their offerings in this area?


Lastly, the experience management industry commands total market opportunity of $44bn in 2018, and a predicted CAGR of 22.9% over the next 3 years. Hitherto, the market is seemingly underpenetrated - reflected in that Qualtrics is the industry leader by a factor of 10x. Seizing this opportunity, and exploiting it to propel Qualtrics to become even more dominate, will only increase the proportion of the market opportunity that SAP can claim.


Risks and uncertainties

Concerns about value creation lie at the heart of this transaction. The associated price tag is almost double Qualtrics’ IPO valuation, which was already considered frothy. Even though Qualtrics’ top line growth has been rapid during last few years, concerns about successfully monetizing customer experience data are valid, as Qualtrics barely broke even in 2017.


Following the deal, credit rating agency Moody’s announced that it will keep SAP’s credit rating unchanged at A2 and the rating outlook stable, indicating that the additional debt of $7bn is not worrying. Although SAP’s non-current debt after the deal is still at a safe one third of its total assets, SAP must deleverage their balance sheet quickly if they wish to use debt to fund acquisitions in the near future - which they have historically done. Failure to deleverage quickly could mean SAP may resort to equity financing for larger future transactions, bringing the risk of equity dilution for current shareholders.


New General Data Protection Regulation (GDPR) sets strict rules for companies operating in the EU with customers’ personal data. Through the acquisition of Qualtrics, SAP is increasing their exposure to these new regulations rather than acquiring companies outside of these regulations, to diversify their total risk, or cyber security firms to bolster the infrastructure surrounding protecting the data SAP systems handle. Under the GDPR, a single data breach may lead to a fine of €20 million or 4% of revenue, whichever is higher. This could lead to potential fines of over €1 billion for SAP - or even more in the case of multiple data breaches, as are quite common.

“I don’t think this is an easy market, based off of where valuations are, to get deals done but I do think that if you find an asset that meets your strategic needs, that deals can get done, and this reflects that.” -Arlen Shenkman, Executive Vice President of Global Business Development and Ecosystems at SAP

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