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Shareholders, Analysts Pan SAP's Strategic About-Face

Reaction to SAP's $6.8 billion acquisition of Business Objects was swift and punishing.

SAP shares fell $2.87 a share, or 5 percent, to $56.36 in Monday trading, suggesting Wall Street wasn't terribly enthused by the enterprise software giant's decision to pay such a high premium -- roughly 20 percent above Business Objects' shares closed on Friday -- to keep pace with arch-rival Oracle in the business intelligence and analytics market.

Oracle, of course, shelled out $3.3 billion to snap up Hyperion in March, a purchase that many viewed as prompting SAP's eventual acquisition of Business Objects yesterday. That move came as the latest in the database giant's three-year, $25-billion spending spree.

But during a conference call today, SAP CEO Henning Kagermann waved away suggestions that the Business Objects acquisition was designed to emulate Oracle's strategy. On the contrary, he said, "we can't see that Oracle is gaining market share."

Instead, he said Monday's "friendly" takeover -- which SAP expects to close during first quarter -- is aimed at complementing the company's long-held policy of growing its business only organically.

In an e-mail to InternetNews.com, SAP spokesperson Lindsey Held clarified that position -- suggesting that the buyout is less an Oracle-inspired about-face than somehow a continuation of SAP's focus on organic growth.

SAP's "strategic intent is and has been to accelerate growth by expanding our market share through organic growth of the core, and not fueled by acquiring customers," Held said. "We are confident in our stated strategy. The transaction with Business Objects is in line with our strategy to complement our existing applications and solutions with smart purchases that bring innovative technologies and capabilities while maintaining our successful organic growth track record."

In any event, the timing came as something of a shock to the markets, considering that Business Objects issued a profit warning just moments after SAP's announced its intention to buy the company.

Business Objects, which makes software for companies to analyze their business decisions and those of their competition, warned that third-quarter earnings would come in between 36 cents and 39 cents a share -- well below the 51 cents a share expected by most analysts.

Cowen & Co. analyst Peter Goldmacher responded to the news by reiterating his "underperform" rating on SAP's shares. In a research note today, Goldmacher questioned both the premium SAP paid for Business Objects as well as its ability to successfully integrate a company of Business Objects' size.

"Despite SAP's assertion to the contrary, this deal is a significant departure from SAP's long-stated position that it intends to grow its code base organically and appears to us to be a tacit acknowledgement that Oracle's M&A strategy has merit," Goldmacher wrote. "We are concerned that SAP has waited too long to make a move in the space and is doing this deal from a position of weakness."

Still other analysts said SAP had little choice but to make an acquisition to fend off the unrelenting pressure applied by Oracle.

"The reasoning behind this deal and Oracle's acquisition of Hyperion is similar," Dave Kasabian, an analyst at AMR Research, said in an interview with InternetNews.com. "Both companies are looking to expand revenue in their base and take market share away from the other. Both organizations realize they have a huge footprint within the enterprise and had to look at BI and performance management to expand it. It's both to protect their customer base and to cut into their top competitor."

During Monday's conference call, SAP and Business Objects executives predicted the acquisition would bring "both data extraction capabilities and market-leading front-end query and reporting tools, complementing parts of the NetWeaver BI stack," referring to SAP's cornerstone platform.

However, Cowen & Co.'s Goldmacher said SAP's rosy outlook doesn't jibe with Business Objects' recent performance and its own string of acquisitions.

"Business Objects has been on a significant M&A spree which has obscured the fact that its query and reporting tools business has been in decline," he wrote in the research note. "We are concerned that SAP is buying a disjointed set of solutions [acquired during the past two years] that include Cartesis and SRC for performance management, FirstLogic for data quality management and Inxight for unstructured data analysis."

Regardless of SAP's assertions about the intent behind the Business Objects purchase, adding the firm's 43,000 customers will likely help in SAP's quest to grow from roughly 41,000 customers to more than 100,000 customers by 2010. SAP said only about 40 percent of Business Objects' customers are using SAP applications already.

"You can't give Oracle all the credit," Kasabian said. "Building things organically can sometimes take too long in terms of developing internal expertise and a client base. Strategically, it's much different than what [SAP has] done in the past. But after watching the way Oracle had done it, SAP realized that if they didn't make the acquisition, they could potentially lose market share."

At least Business Objects shareholders seemed pleased by the news. Shares of the stock rose 15 percent today, closing at $7.56.

They weren't the only ones enjoying the ride. Cognos, the largest remaining independent business intelligence and analytics application vendor, saw its stock rocket on speculation that it too might be acquired by the likes of HP, IBM or even a dark-horse suitor such as EMC. The stock rose $6.05 a share, or 14 percent, closing at a new 52-week high of $50.50.

The company's CEO, Rob Ashe, wasted no time in responding enthusiastically to the day's developments.

"Cognos now stands as THE independent performance management provider in the market and is committed to giving customers equal access to their entire infrastructure, applications and data sources," he said in a statement Monday afternoon. "This is a great position for us to be in."