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M&A speculation heating up for SAP and HP

by Scott Priest, Managing Editor

August 22, 2011

The idea of SAP being bought or merged with isn't exactly new. I've blogged about bits of speculation here in the past and have generally felt like it was nonsense.

Some of the hubbub had gone away, but with HP's prevalence in tech news of late, it's picking back up. HP surprisingly announced its exit from the mobile and PC businesses, instead looking to fortify its other activities while also paying more than $10 billion for software maker Autonomy.

Naturally, my Google Alerts became flooded with SAP-HP talk over the weekend. VentureBeat's Peter Yared notes that in light of all these moves, SAP presents the perfect complement to HP to make an enormous, enterprise-wide conglomerate.

HP’s gaps are perfectly filled by SAP. And SAP’s gaps in services, enterprise search, o perating system, processor, storage and management are all filled by HP. A merger of SAP (valued at $60 billion) and HP (valued at $49 billion) would create a $109 billion behemoth capable of competing with IBM ($188 billion), Oracle ($125 billion) and Microsoft ($201 billion). Large mergers like this can be a disaster, but HP’s CEO Léo Apatheker used to be the CEO of SAP and worked there for twenty years, so there is one person who actually knows both organizations.

Yared points out that M&A activity is on the rise of late, and many companies should be ready to be on one side or another of a purchase. He also provides an excellent chart that amplifies his argument, which you can see in the link above. It's a compelling argument from HP's side, though from SAP's side I'm still not as sure. He later argues that SAP and HP separately will get eaten up by Microsoft, and are already surpassed by Oracle and IBM. But with SAP having such a great year and seeming to have excellent direction, why take on the baggage of a company going through a dramatic shift, and underperforming wildly? Why allow yourself to be scooped up by a company run by a CEO who led you through your worst period in recent history?

Erik Sherman of BNet makes the same argument, and echoes the relationship between the companies being affected by Leo Apotheker. Again, Sherman fails to give a reason why SAP would be interested in a merger. However, he notes that HP is acting o n the right strategy, and is willing to pay dearly.

Now HP’s made that turn, and the markets reacted badly. Yet Apotheker is doing the right thing. Hardware prices are plummeting, and unless you can pull off the creation of an entirely new hardware/software/services ecosystem like Apple (AAPL) has done, that will mean commodity pricing and terrible margins — I.e., a lot of work to make relatively little money.

HP’s trying to follow IBM into higher-margin software and services, but its Autonomy bid was too much money for too little payoff. So, who else might be around that could add big enterprise software and consulting potential that would match with the consulting, server, and printer businesses that HP is keeping? SAP would be a smart choice.

Ragnhild Kjetland and Jonathan Browning of CFOWorld also chimed in on the matter, coming to the same conclusion. But as they note, the benefit to SAP might not even be an issue.

SAP, which is 23.7 percent owned by founders including Chairman Hasso Plattner, could be a target, Theovoux-Chabuel said.

“With some founders interested in selling their stakes at a good price, SAP remains one of the most strategic assets for Microsoft or IBM from an M&A standpoint,” he said.

At a similar valuation to that which H-P is paying for Cambridge, England-based Autonomy, SAP would cost about 100 euros per share compared with about 34 euros, Theovoux-Chabuel said. He has a “buy” rating and 48 euros price target on SAP.

“We are in a very strong position with our portfolio and innovation strategy to continue to grow organically or through tuck-in acquisitions that bring value to our customers,” spokesman Christoph Liedtke said in a telephone interview.

You pair up these last two arguments and the conclusion is clear. If HP is on a spending spree, and is willing to severely overpay for SAP, perhaps the Hasso and the partners would be interested in cashing out. The company has about-faced in terms of reputation, and appears to complement HP well.

Of course, this is all rampant speculation. Some argue mergers, some hostile takeovers. I can even see SAP pulling a Moe Greene -- "You don't buy me out; I buy you out!" (But we all know how that worked out for poor Moe.)

Or maybe SAP will recognize that the chart I mentioned above presents an opportunity. HP could be a depressed asset now -- much like SAP was before it recharted its course for mobile, cloud, and analytical waters. Maybe the idea of a merger or buyout becomes more appealing. Either way, I wouldn't expect the speculation to go away any time soon.

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