Shares of SAP (NYSE: SAP ) traded higher after the company announced that it had acquired Camilion, a software company that aids in the efficiency of insurance and financial services companies. The deal is said to broaden SAP's solution portfolio in the insurance space as it will provide insurers with powerful software tools to streamline the management and creation of new products.
Have we been here before?
SAP is no stranger to acquisitions. Over the past couple of years, the company has been very active in an effort to better compete with database giant Oracle (NASDAQ: ORCL ) and IBM (NYSE: IBM ) . But the results have been mixed. In 2011, SAP went aggressively after SuccessFactors, for which it paid $3.5 billion, or eight times its revenue.
I felt that was a pricey deal, but it was one that SAP had to make, given Oracle's deal for Taleo, which was followed by IBM's deal for Kenexa. In 2010, SAP also acquired Sybase for $5.8 billion. That was too much to pay for a company that only generated $1.1 billion annually in revenue and only $130 million in net income.
The profit margin wasn't particularly impressive for a company that was acquired (presumably) to boost the bottom line. What's more, aside from buying a semi-rival, it was unclear how Sybase was going to present SAP with an extra competitive edge in its core business. And the $5.8 billion offer boosted Sybase's P/E from 21 on the date of the announcement to 29 as the stock shot up 56%. The premium wasn't justified.
Although SAP has performed adequately since these deals, the company has lagged behind both Oracle and IBM in recent performances. Although the terms for privately held Camilion have not been revealed, if it's like Sybase and SuccessFactors, it's likely to be a pretty lucrative deal. But I'm just speculating. What really matters today is what SAP believes it is getting.
Will there be good karma?
Assuming that the deal goes through, it should strengthen SAP's existing insurance solutions portfolio, which is already one of the best in the industry. The deal for Camilion puts SAP in a strong position to capitalize on the strength of an integrated core insurance platforms market.
Simon Paris, SAP's global head of Financial Services, said, "With this acquisition, SAP is able to meet the needs of insurers that face a challenging new business environment and that need to make significant product and strategy changes quickly at low risk. Camilion brings deep expertise and trusted relationships in the new age of insurance applications, well recognized by customers and analysts."
Clearly, there's considerable value in the deal. But I'll feel better once I hear what management has to say about growth prospects and how Camilion can contribute to the top and bottom lines. Better still, I'd like to know how much SAP is paying in this deal. This disclosure will go a long way toward setting performance expectations. To that end, the company can use a little help, because although revenue advanced 12% in the recent quarter, it still fell short of estimates.
It also seems that SAP is being outmaneuvered in the software-as-a-service, or SaaS, business. This is where rivals like Ssalesforce.com thrive. While the case can be made that SAP is beginning to get a stronger foothold in the SaaS market with SAP Cloud, the growth momentum of Salesforce and its nimbleness continues to stunt advancements by more mature rivals. SAP is not alone in this; IBM is feeling this same effect.
Camilion can become a great asset to the extent that it offsets weakness in SaaS and other end-markets, while giving SAP more time to shore up its Cloud initiatives. I suspect at some point management will speak on this deal and give investors a better sense of what kind of karma Camilion can bring. While the Street is rewarding SAP today for this deal with new 52-week highs, it's premature to jump for joy.
What of the stock?
I like SAP's business and I think the company has an excellent management team. I'd feel much better if the company can get operating margin to pick up again, as it grew much slower in the recent quarter. While SAP's operating margin still leads IBM by 4%, it trails Oracle by 17%. I think that difference is too meaningful for a stock that trades at a P/E of 27 to Oracle's 16. Plus, with a recent 7.8% year-over-year decline in earnings, the valuation is too demanding.
The amount of data we store every year is growing by a mind-boggling 60% annually! To make sense of this trend and pick out a winner, The Motley Fool has compiled a new report called "The Only Stock You Need to Profit From the NEW Technology Revolution." The report highlights a company that has gained 300% since first recommended by Fool analysts but still has plenty of room left to run. To get instant access to the name of this company transforming the IT industry, click here -- it's free.