SAP Buys Concur for $8.3B – A Great Deal (But Out of Necessity, Not Strength)

Three members of the Spend Matters team ended up on the SAP and Concur investor call that was held just under an hour after the acquisition announcement. In the coming days, look for much more additional analysis on Spend Matters PRO with specific insight into how the T&E acquisition is likely to impact SAP customers, competitors and the general marketplace. But first, in the spirit of public service so that investors, CPOs, IT staff, travel managers and a general procurement audience can really understand what is happening behind the scenes at SAP and with the Concur transaction, we offer some public commentary, taking the metaphor of the stage (before the curtain goes up, for the numbers behind the transaction and the basic highlights, see our first take on the deal from last night: ANALYSIS: SAP SE to Buy Concur Technologies Inc, By the Numbers).

Queue Bill McDermott, Stage Left!

The investor call started somewhat innocuously with SAP CEO Bill McDermott claiming that “We are expanding the world’s largest business network to innovate the future of business within, and between, companies, and people [emphasis added].”

Smart. A good marketing and positioning strategy. Focus on person. Focus on mobile. Focus on simple. It's about: “Helping the individual [corporate] traveler “run simple.” But although SAP makes the argument that Concur is “making life simpler and better for individual users – leveraging the biz network,” it’s important to take a step back and realize that Concur already had a ‘business network’ and a functional ecosystem.  Concur will likely not want to get distracted trying to integrate to the SAP business network, but rather, keep growing.  This is the KEY message here:

SAP has to grow. 

Bill said “We are a growth company.” This is his charter. He can sell simple.  But simple is not in SAP’s DNA by any stretch of the software imagination. Although SAP co-founder Hasso Plattner helped design the HANA database (other components like Search [TREX] were acquired), SAP has admitted, with its actions, that it struggles with developing its way into the cloud at the infrastructure, software, and network layers together.

When SAP has tried on its own, it’s been challenging at best. Look at ByDesign. The company HAS to grow through acquisitions. And it’s creating a 'mutual fund' of sorts in contrast to a true integrated holding company with the same collaboration and Six Sigma DNA that conglomerates like GE have running through them.

Act 1: Ariba – The Journey Begins

The main plot of the play begins when SAP bought Ariba to replace the ‘dead-app-walking’ SRM product (even though with Ariba, the apps are also fairly long in the tooth). Moreover, an indirect eMarketplace turned business network is problematic, especially with a supplier fee structure that goes against what every competitor has done in the market either providing a free or low cost transactional on-ramp. And Ariba Discovery is languishing. So, the solution has been to partner with eBay?  Good luck with that.

Well, what about trade financing and payments? AribaPay is still basically on the launch pad and all the partnerships with Receivables Exchange and the native dynamic discounting capability through Ariba P2P and the network itself have been collecting shelfware cloud dust over the years. Taulia is eating SAP's lunch here for now, but time will tell.

So, the “business network” thing is tricky. As we’ve said over the years on Spend Matters, SAP should be the platform to help build the network, not the toll collector. Build an ecosystem.

Is the SAP Cloud and Network Ecosystem Finally Here?

Since the Ariba acquisition, we’ve been the most ardent supporters of SAP building an ecosystem around the assets. See our paper on this topic here. Perhaps they’re finally doing it (a fascinating PPT/PDF -- start with slide 23: “One Company: Three Business Models”  apps/net/platform.)

Now let’s move to slide 49, which on the surface is very much in line with what happened on the investor call. As Bill said, “The future business will run in the cloud, on the SAP HANA platform, and over the business network. SAP is the only company in the industry with the depth to help enterprises manage permanent employees, flexible workforces, goods, services, and now travel & expense on one cloud platform.”

But, Slide 49 is actually the problem. SAP does not run simple with this architectural mish-mash. It’s fragmented. And Ariba doesn’t do direct spend today – not even close. And the bottom layer is now Concur?

When you’re ready, flip to Slide 50 and let the claim of  “74% of world transactions” ring in your ears, which is of course as farcical in reality as it sounds coming out from a salesman’s mouth.

In reality, the “network” is floundering as SAP has opened itself up to countless competitors through a lack of core innovation and disconnected pricing models. And it really needs to be an ecosystem. Yet to be an ecosystem, it needs a platform and an app marketplace on steroids to house its own stuff and partner apps that all work together. So, for the platform as a service (PaaS) aspect, it has HANA database and a basic PaaS and a hastily assembled marketplace with mostly its own niche apps.

Going back to the previously mentioned deck, slide 7 is best one (in theory). The Cloud LOB apps will replace/consume their on-premise brethren, and the “miracle happens here” is the SAP HANA block in the middle, where HANA runs alongside of on-prem.

Bueller, Bueller?

Think about this for a moment. Is anyone awake in the classroom?

What we’re talking about is application necromancy…the new stack and platform talking to the aging apps until the new LOB apps arrive and also get HANA’ized and network’ized. But, re-writing them and making them open doesn’t solve the problem of them being stove-piped and having overlapping data models. This is the problem with the bottom of slide 7.

Integration leads to new and innovative business processes.” Really? Actually, it means huge spending and a calcification of acquired apps. At least Oracle has Fusion to ‘build to’ – not a composite app flotilla bolted together by HANA fairy dust. That said, if Oracle buys Coupa, Fusion Procurement will look like SAP ByDesign.

Act 2: Concur – The Journey Continues

No doubt, Concur was great deal for both parties, but out of necessity, not strength. We’ve started to explain the SAP weakness above. Concur was a decent business. Not profitable, but cash flow (ops) positive. It was, however, stuck in T&E land, which is a weird market like I wrote about here. It’s a spend category of sorts along with a P2P sub-channel (expense reports).  And although soon-to-be billionaire CEO Steve Singh's bravado on the call was understandable with his statement, "great companies are not for sale – they are acquired!", the Bloomberg article that broke the story on the pending acquisition did in fact allude to Concur being "shopped''.  Still, Steve can't be too upset with Bloomberg since the article probably upped the price tag by another billion or so.  SAP actually called out that article on the investor call, obviously not pleased with the leak.  Bloomberg also just reported that Deutsche Bank just underwrote the loan and that it represents the largest investment-grade underwriting for a European acquisition by a single bank this year.

That is a lot of money, but did SAP overpay?  At first glance, you would have to think yes, but you have to dive a little deeper.  Concur has a great little ecosystem. And the TripIt acquisition was a master stroke: visibility across all itineraries (sounds like a good job for HANA). But, it has a ‘business network’ that works, and works in a way that is consistent with what SAP should be moving toward – and that is to provide a platform and ecosystem of partners (and itself) using HANA-powered apps and truly open networks (not just the Ariba network marketplace and Quadrem). It's not a closed toll road.

Concur makes money by revenue sharing with partners in its app marketplace, which is part of broader strategy. Steve said the problem is: “How do we re-invent the travel supply chain? How do we use the business to “connect” all the companies that serve those companies?" He’s clearly asking the right questions. There’s good stuff in the Concur app treasure chest (see the previous link): VAT reclamation, connectors, expense-related drill-down apps (e.g., wireless bills).

AND, Uber, Starbucks, etc. (mentioned on the investor call by Bill) all want to play together to connect their apps – i.e., not just AmEx downloads to the expense report because they are PARTNERS. Uber plugs into corporate networks and Concur plugs into the Uber Grid. They both get value.

Yet we still have questions. For example, do you think that they want to get charged a percentage of commerce? Maybe it will go this way (which is what SAP wants), but fundamentally, should SAP be an intermediary in the commerce - or an enabler?

It seems they think the former. Bill said, “With billions spent on fees from multiple intermediaries, this travel market is ripe for innovative collaboration in a network based model.” Read through the lines on this. Actually, the CFO did that explicitly, saying: “We expect all of this [SAP taking Concur global] will rapidly increase the number of participants connecting to the Concur platform, just as we are doing it with Ariba and FieldGlass, which in turn drive up the transaction volumes and highly predictable recurring revenues.

But, SAP needs to be careful not crush the little T&E goose that laid the $8B golden egg for itself. No doubt, SAP can still make money through Concur's SaaS model, as with Ariba. As the CFO said, “we can make money while we sleep.” Or paraphrased, "People will be traveling around the work and submitting T&E reports."

To go beyond this, SAP has some serious homework to do. And 10X forward topline revenue is a tremendous amount to pay to execute a strategy that is very much a work in progress.

Stay tuned as our coverage of SAP and Concur continues...

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