SAP Data Center

Christian Klein, the young boss of SAP, made his first big strategic decision. While his predecessor was particularly noticeable due to expensive acquisitions, he tries it the other way round: he announces the spin-off from Qualtrics, which only slipped under the SAP umbrella in 2018.

But is it about reversing a possible wrong decision by Bill McDermott? Probably not. Rather, it shows a clear strategic calculation that brings three advantages.

goal achieved

Qualtrics actually wanted to go public in 2018, targeting a market cap of up to $ 4.5 billion. But then SAP came on the scene and made a much better offer: a complete takeover at a cash price of $ 8 billion. At first glance, this seemed very surprising, since the company only had a turnover of $ 400 million at the time.

But for Bill McDermott, it was the last building block in his strategy. SAP had already successfully initiated the transformation towards the cloud, extended its feelers far to the Internet of Things and, with HANA, had a market-leading database technology that enables real-time analysis. The cross-company control, automation and analysis of the data streams from the sensor to the cloud was therefore ensured.

However, what was missing for the vision of the “Intelligent Enterprise” was the humane component, which consists of significantly more than data. In order to incorporate these experiences in real time, powerful tools are required. Qualtrics invented term experience management (XM for short).

In addition to the deeper integration of factory control and product development with administration and sales, which has been raised to a new level through the recently announced alliance with the digital division of Siemens, the integration of XM creates a feedback loop that helps the effect of measures to measure faster and more precisely.

As soon as the interaction of all these components runs smoothly, even large organizations can ideally be managed in a similarly agile manner to aspiring start-ups. SAP now had enough time to integrate Qualtrics technology and its solutions in an optimally coordinated manner. In addition, the two years should have promoted mutual understanding of the strategic path forward.

SAP has brought Qualtrics on line: The “unique and end-to-end system for the management of experience and business processes” stands. A new chapter can now be opened.

That’s why Qualtrics can move forward faster on its own

Qualtrics should also not be split off completely. Therefore, it can hardly be said that Christian Klein is turning back the purchase. Rather, SAP wants to keep the majority and continue to work closely with the subsidiary. Nevertheless, a stock exchange listing will provide more freedom of movement. If necessary, Qualtrics can secure capital and motivate employees with its own stock options and the like.

The management has stayed on board and will be able to drive its growth strategy forward more independently in the future. It is foreseeable that it will be easier to convince SAP’s competitors of the integration of its XM solutions when Qualtrics is no longer a 100% subsidiary. I could also imagine that the main rival Medallia outside the SAP world has recently been more successful in customer acquisition.

For example, a few days ago it was read that Medallia and Adobe want to implement a continuous integration of customer experience management into the Adobe Experience Cloud. The increased independence will help Qualtrics to create similar deals.

Make the value visible

Another thing is that the takeover price seemed extremely expensive two years ago. For months, the SAP stock was weak, as if the $ 8 billion had been thrown out of the window with no equivalent. To date, many doubt whether the deal was worth the money for the company. After all, SAP’s annual profit over the past five years averaged around half of the purchase price.

Once Qualtrics is traded on the stock exchange, we will know exactly how the market values ​​it. If one assumes that the share would have developed similarly to the technology index Nasdaq 100 without the intervention of SAP from November 2018, then it would probably have increased by about 50% to a market capitalization of just under $ 7 billion.

It is obvious that the close cooperation with SAP has created synergies on both sides. It therefore seems realistic to me that Qualtrics can achieve a valuation of at least $ 8 billion as long as the stock market climate remains friendly.

Free resources

For SAP, the IPO also represents an opportunity to strengthen its liquidity situation. The software group is well capitalized and has the highest credit rating, but as of June 30, a hefty € 18.6 billion financial debt was on the books.

It is not yet clear whether the shares will be posted to the SAP shareholders free of charge or sold in a bidding process. In the second case, several billion US dollars would flow into the coffers, which the group could well need in order to repay expiring financial debt amounting to 2.2 billion euros and to tackle new growth issues.

Bill McDermott was convinced that he had left a future-oriented solution portfolio, the potential of which only had to be developed by his successor. I wouldn’t be surprised if Christian Klein soon pulls the next growth initiative out of his hat. Then billions are needed again. Valuable resources are freed up for this through the independence of Qualtrics.

The post SAP is preparing the next development leap with the Qualtrics IPO appeared first on The Motley Fool Germany.

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Ralf Anders participates in Siemens’ share performance through an index certificate he manages. The Motley Fool owns shares of and recommends shares in Adobe Systems and Medallia Inc.

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