Cloud computing rivalry heats up
Strong acquisitions are key in this business, and SAP is showing more initiative with plans to buy SuccessFactors.
SAP AG (SAP) launched another attack in its ongoing battle with rival Oracle (ORCL) with an announcement that it is on the verge of acquiring software company SuccessFactors (SFSF) for $3.4 billion in cash.
SuccessFactors is a leading developer of cloud computing software used by firms to evaluate employee performance. The acquisition is expected to give SAP a much needed growth platform in the software-as-a service (SaaS) market, where it faces significant competition from Oracle. Analysts believe that the acquisition will boost SAP’s competitive position in human resource applications, while reaffirming its commitment to SaaS as a key business model.
However, we believe that Oracle is better positioned for growth than SAP, primarily owing to accretive acquisitions over the past few years which have evolved into a strong product pipeline. In October, Oracle acquired RightNow Technologies, a premier software provider and a rival of SAP for $1.43 billion. For further details please see Oracle to Acquire RightNow.
The acquisition expanded Oracle's public cloud offering and helped the company penetrate the SaaS application space. The addition of RightNow also helped Oracle to targetSalesforce.com's (CRM) service cloud offering and took the prevailing competition between the two to the next level.
SAP has been a laggard in this space over the years. According to Bloomberg, Oracle has spent more than $42 billion on acquisitions since the beginning of 2005, while SAP only made only two large acquisitions in its history before SuccessFactors. SAP lags Oracle in the SaaS market, owing to its late entry in the market and this will hurt its competitive position going forward.
SaaS consolidations continue
SaaS has gained immense importance in recent times due to the increasing adoption of cloud computing. According to research firm IDC, cloud services are moving from the early adopter stage to a core part of mainstream operations.
IDC forecasts that approximately 80% of new software offerings will be available as cloud services by 2014 and over a third of software purchases would be through the cloud. Most importantly, public and private clouds are expected to drive 15% of information-technology spending, growing four to five times the rate of the overall IT market.
According to research firm Forrester, cloud computing revenue is expected to increase from approximately $41 billion in 2011 to $241 billion in 2020. The Gartner research firm projects revenue of $148.8 billion by 2014, higher than Forrester’s forecast of $118.7 billion for the same period.
SaaS, a software delivery method that enables data access from any device with an Internet connection, touched the $10 billion mark in 2010 and is expected to more than double to $21.3 billion by 2015, much faster than traditional software, according to market research firm Gartner. Customer relationship management continues to be the most prolific market for SaaS, with revenues estimated to reach $3.8 billion in 2011, up from $3.2 billion in 2010.
This huge growth potential has prompted companies such as Oracle and SAP, who were initially hesitant to enter the domain, to spend more on accretive acquisitions in order to gain traction in this market. Both Oracle and SAP paid huge premiums to acquire RightNow (22%) and SuccessFactors (54%), which clearly reflects the growth potential.
Beside Oracle and SAP, Salesforce.com also continued its acquisition spree in 2011 in a bid to diversify its traditional customer relationship management software. Salesforce acquired Radian 6, Assistly, Manymoon, Heroku and Etacts this year, and most recently announced the acquisition of Model Metrics, a mobile and social cloud consulting services company.
We expect further consolidation in the SaaS market going forward. According to Gartner, Oracle will continue to acquire and roll out more cloud products over the next couple of years, thereby boosting its position in the SaaS market. SAP is also expected to get more aggressive with its acquisition strategy in order to make up for its late start.
We believe that competition will continue to increase in cloud computing markets. Niche companies, which are easy to integrate within existing or new product lines, will be the primary acquisition targets going forward. We also believe that companies with significant free cash flow will have an upper hand over the long term.
We remain neutral on Oracle, SAP and Salesforce over the long term (six to 12 months). Currently, Oracle has a Zacks No. 2 Rank, which implies a "buy" rating on a short-term basis. Both SAP and Salesforce have a Zacks No. 3 Rank, which implies a "hold" rating on a short-term basis.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
These hot movers could rise by double digits in coming months.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.