Is SAP Overpaying For Business Objects? Some Say Yes

SAP (NYSE: - ) said Sunday that it would pay 4.8 billion euros, or $6.8 billion, for France-based Business Objects, one of the largest makers of BI software. Companies use the software to analyze and make better use of their vast stores of data.

The price represents a 17% premium to Business Objects' closing U.S. stock price on Friday, when the stock rose 5.7% as takeover rumors swirled. If OK'd by shareholders, it would be the largest acquisition ever for SAP. The German company has long favored organic growth, but the business intelligence market has been consolidating.

SAP's U.S. shares Monday fell 4.9% on heavy volume.

Some analysts saw the deal as a costly delayed reaction to an ongoing acquisition binge by SAP archrival Oracle (NasdaqGS: - ). In April, Oracle paid $3.3 billion for Business Objects rival Hyperion Solutions.

SAP's purchase of Business Objects is "too late and too expensive," said Trip Chowdhry, an analyst at Global Equities Research. He rates Oracle stock as overweight, or buy, but doesn't have a rating on SAP.

"I'm not impressed, because this thing should have been done three years back," Chowdhry said. "It's like SAP has been sleeping for the last three years, and now they've suddenly woken up and they're trying to be a part of the shifting industry landscape."

The deal had been widely rumored in the industry over the last few months.

On a conference call with analysts Monday, SAP Chief Executive Henning Kagermann said the merger would create synergies to speed up revenue growth for SAP.

"We think that one plus one equals three in the market," he said.

Business Objects CEO John Schwarz said the deal would cut out duplicate sales efforts and give Business Objects more opportunities to sell into SAP's huge base of clients.

"You can bet we'll be after them like a chicken after corn," he said.

Competition is rising as BI becomes critical for businesses.

Business Objects was the market leader in 2006, with $894 million in BI revenue, according to industry tracker IDC. Privately held SAS ranked No. 2 with $679 million, followed by Cognos (NasdaqGS: - ) with $622 million. Microsoft (NasdaqGS: - ), Hyperion, SAP and Oracle also ranked in the top 10.

Kagermann said his managers were too swamped with other strategic initiatives to make any major acquisitions in recent years. But he wouldn't rule out making any other large purchases.

"We have never excluded acquisitions if they make strategic sense, and if SAP as a company is prepared to digest them," Kagermann said.

The consolidation wave is not over for the remaining companies that specialize in BI, says Sanford Bernstein analyst Charlie DiBona. He rates SAP stock as market perform. "We expect the BI sector to rally for the smaller firms," he said.

Potential BI targets include Cognos, Microstrategy (NasdaqGS: - ) and Actuate (NasdaqGM: - ). Analysts say some possible buyers include Hewlett-Packard (NYSE: - ), EMC (NYSE: - ), IBM (NYSE: - ), Oracle and Microsoft. Cognos shares jumped 13.6% Monday. Actuate rose 3.6%.

The timing of the latest deal surprised Jefferies & Co. analyst Ross MacMillan, because Business Objects had just said it would miss earnings and revenue estimates for its most recent quarter.

SAP should have allowed Business Objects' stock price to adjust downward on that news before making a deal, says MacMillan. He describes the Business Objects purchase as "a mercurial change in strategy" for SAP.

"But SAP is mindful that they can't sit on the sidelines for too long" during this consolidation, he said. Jefferies rates SAP stock as neutral.

The move makes strategic sense for SAP, Kirk Materne, a Banc of America Equity Research analyst, wrote in a note. SAP's change of direction also "lends credence to our view that a strategy based on acquisitions (i.e. Oracle's strategy) is likely the winning strategy given the maturing state of the software industry," he wrote. He rates SAP stock as neutral.

Business Objects executives say they weren't shopping their company but got some unsolicited offers before choosing the bid from SAP. The companies expect to close next quarter.