SAP SAP -4.37% has sent the clearest signal yet that its head is squarely in the cloud.
SAP’s $8.3 billion agreement, including debt, to buy U.S.-based Concur Technologies,CNQR +17.64% which makes software to help companies manage travel and expense accounts, is the German company’s biggest acquisition. SAP will become the second-largest enterprise cloud-service company by revenue behind Salesforce.com.CRM +1.01%
Cloud services deliver software online to business customers on a subscription basis. This allows enterprise customers more predictable expenditures, with a steadier, recurring revenue stream for the provider. Cloud-based spending among businesses globally will increase about 23% annually until 2018, or about five times the rate of the broader IT industry, says International Data.
Adding a cloud-based travel and expenses business to SAP’s existing stable of finance and logistics services is a sensible move as businesses migrate from on-premise software licensing, SAP’s bread and butter.
While growth in the company’s core business has stalled, SAP Cloud is expected to increase sales about 35% in 2015, albeit from a much smaller base, according toUBS. UBSN.VX +0.30% The business accounted for only about 5% of SAP’s 2013 revenue.
Concur, which broke even this year, is a one-stop shop allowing customers to get the best prices when they book travel and then file expenses. It should add at least $700 million in sales to SAP, about 55% of SAP’s cloud revenue last year. Concur could also enhance SAP’s existing businesses, such as Ariba, which offers cloud-based business-procurement software.
But at 9.6 times 2015 sales, SAP may be sacrificing profit for scale with Concur unless it can deliver more growth. Improving Concur’s growth rate should be possible. The bulk of its sales are in the U.S. The majority of SAP customers don’t use Concur, while just 30% of Concur customers do business with SAP, so there is plenty of room for cross selling.
The risk to SAP is that additional revenue in the cloud could come at the expense of its server-based business. Moreover, competition is rising. Oracle, ORCL -4.21%which also faces a challenge expanding in the cloud-computing business, said in July that it plans to buy TOA Technologies, its third acquisition this year in cloud-based applications.
Investors should applaud SAP for reaching for the cloud. But to make pricey deals work, the company will need its feet firmly on the ground.