In the enterprise software game, Germany-based SAP (NYSE:SAP) is a major player. Qualtrics, by contrast, is a youngish upstart headquartered in Utah, but its cloud presence is strong, and SAP is pushing itself in that direction. So perhaps the deal to buy it was a sensible decision.
But, as MarketFoolery host Chris Hill and Motley Fool Asset Management's Bill Barker discuss in this segment, the market seems to disagree in some way -- perhaps relating to the price tag. The guys discuss SAP's business, the share price moves in context, and the company's model more broadly.
A full transcript follows the video.
This video was recorded on Nov. 12, 2018.
Chris Hill: It's the Deal of the Day. SAP buying Qualtrics International for $8 billion. SAP is the enterprise software company based in Germany. Qualtrics, a young up-and-coming company based in Utah that had filed the necessary paperwork to go public. I guess SAP came in and said, "We hear you're looking to raise around $200 million in your IPO. Here's a check with a couple more zeros."
Bill Barker: Yes. I think the second-biggest acquisition for SAP ever, maybe, extends its ventures into the cloud. That's where it is attempting to position itself for the future, as it moves all of its businesses there. This is part of that. I don't know the Qualtrics numbers to know if this is a good price, but the market is certainly taking the opposite end of that.
Hill: Yeah, I was just going to say, SAP was down about 6% at one point this morning. Clearly, there's some thinking there that they probably could have gotten this for less.
Barker: Seems like it. I'm not going to say they could have. But that is the market's interpretation. And actually, not one that is different from the large majority of reactions to an acquisition, which is typically that the acquirer goes down because they've paid a premium, and for the most part, people don't think that's necessarily the best use of cash. A lot of times, it's not.
Hill: This is also a good day, and we see this play out in pretty much every industry, where either one company gets bought, and then other companies in that space rise a little bit as a result of that. Or, this company in the industry reports great earnings, so maybe that portends good things for other companies. In this case, it's SurveyMonkey, which certainly has a catchier name than Qualtrics International. SurveyMonkey shares are up a little bit. For those who bought into the IPO and have seen their shares of SurveyMonkey essentially do nothing but go down since the IPO just a couple of months ago, today, given a brief respite from that.
Barker: I'm not coming into contact with a lot of Survey Monkey results in my daily life, although I frequently check FiveThirtyEight to look at their data analytics work on things political. There are frequent SurveyMonkey polls that show up in their collection. It's given a very, very low ranking. It gets a grade of D minus.
Hill: [laughs] That's not as low as you can go, but it's pretty close.
Barker: There are things that get Fs. But a D- is a bad, bad grade. In comparison to the way that other polls are done, which are more human-intensive, SurveyMonkey results are not, at least by Nate Silver and his crowd at FiveThirtyEight, deemed particularly reliable compared to the other frequent surveyors and poll-takers out there.
Hill: If you listen to our Industry Focus podcast, you may have heard Dylan Lewis, who hosts the Technology show on Fridays, recently did an episode about SurveyMonkey. I was going back and forth on Slack with Dylan this morning about SurveyMonkey and being up on the news. One of his comments was, "SurveyMonkey is the Blue Apron of tech." I don't completely understand it, but it certainly doesn't sound like a compliment.
Barker: No, it doesn't, especially given how Blue Apron has done as a public company. I don't think we're hearing a lot of compliments about SurveyMonkey out there. But you could help with their branding.
Hill: Yeah. When Dylan put out on Twitter, "We're going to be doing a show about SurveyMonkey. What questions do you have?" All of my questions were about the name. Why did they pick monkey? Why didn't they go with dolphin? Aren't dolphins supposed to be the smartest animal? Stuff like that. How many names did they go through before they said, "We'll go with monkey."
Barker: You don't necessarily, when you're polling, want the smart animal. You just want the representative one. You're trying to get everybody to take your survey, not just the smart animals.
Hill: I think if you're a data analytics company, you want to demonstrate that you are smart. I'm just saying, dolphin strikes me as smarter than monkey.
Barker: There's debate about that.
Hill: Not a great debate.
Barker: [laughs] About whether dolphins are smarter than monkeys? I mean, we could debate. There are different ways of measuring their intelligence.
Hill: I guess so. I'm just saying that when I think about Flipper, Flipper had it all over whatever monkey was on. What's the biggest monkey in TV history? Is it B. J. and the Bear? That kind of thing?
Barker: That's an orangutan.
Hill: Was it?
Barker: It wasn't no monkey, what are you talking about?
Hill: Are they different? Are you saying monkeys and orangutans are different?
Barker: What kind of a primate are you? Let's get back to something vaguely related to the issues at hand, which is SAP, which is actually where we started this a while ago. Whenever we're talking about SAP, I'm reminded of the Arsta rule regarding investing in or alongside companies that do business with SAP.
Hill: This is named for your colleague, Tony Arsta?
Hill: I know Tony, but I'm unfamiliar with the Arsta rule.
Barker: I had to check with him to get the exact formulation of it. As Tony formulates it for my benefit, it is, "Sell any stock the moment a company announces that they are implementing SAP. The setup always takes longer, and costs much more than originally projected. Meanwhile, they also tend to delay other improvement projects. Once they have the bugs ironed out, they will be a more efficient company, but that's probably at least two to three years out."
Hill: Safe to say, Tony is bearish on SAP.
Barker: Not necessarily the company. Just on companies that end up utilizing them, or at least that the stock price will not be attractive. It will not move in the direction you want as a bull, for two to three years. That's for other people to look at. But it's been his experience that when a company utilizes SAP, it tends to be a little rockier than they hope, or at least than they tell people it's going to be.