The SAP - Sybase Merger: Surprising Possibilities in Mobile Software

by Tony D'Altorio

The SAP - Sybase Merger: Surprising Possibilities in Mobile Software

by Tony Daltorio, Investment U Research

Thursday, May 27, 2010

Earlier this year, SAP ADR (NYSE: SAP) reported a 28% drop in annual software sales.

Needless to say, investors in the company were not pleased. So it let CEO Leo Apotheker go, and welcomed Bill McDermott and Jim Hagemann Snabe on board to share authority in his place.

Since SAP hadn't made any deals for nearly three years, it had €3 billion in its piggy bank. That didn't last very long though. The new leadership quickly spent all of that plus some in a $5.8 billion deal for Sybase (NYSE: SY).

That bold move marked the second largest deal the company had ever made. It came second only to the $6.1 billion acquisition of Business Objects in 2007.

SAP paid a generous 44% premium for Sybase - $65 a share for a stock that hadn't hit over $50 since the mid 1990s. The screams of agony from SAP shareholders were almost as loud as their long-suffering Sybase counterparts' screams of joy.

Without a doubt, SAP paid a lot. For that matter, it quite possibly shelled out too much for Business Objects in 2007 as well. But can it recoup those losses and even grow going forward?

The facts seem to indicate that it has a surprisingly strong chance.

SAP Tries to Play Catch-Up

SAP may very well have tried mimicking its rival, Oracle Systems (NASDAQ: ORCL).

Oracle was the first major software maker to aggressively pursue acquisitions. And it has spent over $42 billion to buy some 60 companies in recent years.

Of course, what works for Oracle might not necessarily work for the competition.

Acquiring Sybase allows SAP to offer its corporate customers a database to run their applications on. Yet Sybase clocks in at a distant fourth in the database market. It has a mere 3% share, while Oracle boasts a full 40%. IBM (NYSE: IBM) has 25% and Microsoft (NASDAQ: MSFT) claims 20%.

Many industry insiders consider Sybase to be a "dusty" and "broken" company. And chances are high that most of SAP's customers will stick with the competition on this one. So if the deal is strictly about databases, it makes absolutely no sense.

But the company argues that Sybase makes sense. Specifically, it points to its acquisition's cutting-edge technologies, particularly for mobile phones.

Attacking Its Rivals With Mobile

Merely 27% of Sybase's $403 million in software sales comes from mobile software.

But SAP has it right... Sybase is a leader in software designed to put business applications onto such devices. Its software operates 1.5 billion messages daily, according to its CEO, John Chen.

SAP plans on offering companies the ability to run its real-time business analytics applications on mobile devices from any location. And that could give it an edge as it battles to defend its market share. After all, global mobile devices outnumber broadband connections as much as eight to one.

Such access could become even more important in emerging markets such as China, where Sybase already claims a significant stance. Those countries are experiencing an "explosion in mobile data."

Yvonne Genovese, an analyst at technology consultancy firm Gartner, sees further potential in the deal. She notes that "Not many companies have that capability and it will give SAP an incredible boost."

The deal will also help it push its in-memory technology, where data is stored on a chip instead of a hard drive. Many people consider it the next big leap in computing. And SAP says it can cut database analysis from hours to seconds. By implementing it in Sybase's databases, its new parent company can better sell the concept.

That's especially true since Sybase's clients are focused on the financial and trading world. SAP believes in-memory technology will do best in those areas because of the size of data and the speed needed by those industries.

SAP-Oracle Competition Is Heating Up

Going into the database business will definitely heat up the competition between SAP and Oracle.

Up until now, SAP has actually partnered with Oracle, IBM and Microsoft. It uses their databases as part of its enterprise software systems. But it won't need them anymore when it begins offering the Sybase solutions as part of a complete in-house "stack" of software. That should save them money in the end.

And on a broader level, the Sybase deal sends a clear signal of change at SAP. In the past, outsiders have long seen the business as too cautious and slow to adapt. Yet the new CEOs seem to be changing all of that.

In his latest results press release, Oracle's CEO Larry Ellison openly mocked his smaller rival. But he may be laughing too much and too soon...

SAP may have the last laugh in the end after all.

Good investing,

Tony Daltorio

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