SAP announced on Sunday that it plans to acquire IPO-bound startup Qualtrics for $8 billion cash.
Qualtrics was on the verge of its IPO — it was even on its roadshow with potential investors this past week. It had expected to raise about $495 million in its IPO and at the midpoint of its $18-to-$21 price range, it would have been valued at $4.8 billion.
And the roadshow was going well, said Qualtrics CEO Ryan Smith in a press conference with SAP CEO Bill McDermott on Sunday. All signs pointed to a very successful first day of trading and beyond, because Qualtrics had been cash-flow positive for most of its history even amid its rapid growth, and it was reporting a net profit, said Smith. It had earned $289.9 million in revenue in 2017, up 52% from its $190 million in revenue in 2016 and reported a net income of $2.5 million, up from $12 million in losses in 2016.
“Our IPO was going extremely well,” Smith said on the call. “We were the only show on the road last week and it was going as well as any IPO of … a cash positive high-growth company.”
“We chose to be here,” Smith said of the acquisition.
SAP Bill McDermott doubled down on the idea, saying, “Ryan is being modest. I happen to know this was going to be the most successful IPO of 2018. He’s oversubscribed.”
All of that helps to explain why SAP is paying quite a premium for Qualtrics, which was valued at $2.5 billion at the time of its last private fundraising.
The two said on the phone that SAP had been in talks with Qualtrics for “a few months,” with Smith claiming that McDermott “really chased it down.”
With Qualtrics, McDermott is buying growth in the oh-so-important cloud software market. SAP is best known for its financial software, known to the industry as enterprise resource planning (ERP). It is the world’s largest supplier of ERP software, competing with the likes of Oracle.
But SAP is also going head-to-head with just about every other big cloud software player as well, including market and sales software. Qualtrics complements SAP’s flagship offerings, the same way that LinkedIn complements Microsoft’s customer relationship management (CRM) strategy.
Qualtrics is itself the leader in online market research software. And it has been repositioning itself into a new market that Smith has dubbed “experience management.” By that, he means helping companies get a complete world of their perception and performance, as seen by customers, employees, partners, and anyone else whose opinion matters for your business.
McDermott says of the Qualtrics deal that “this is the No. 1 most transformative thing I’ve ever been involved in.”
He explained the premium price tag in a more practical matter, too. “This is less of a multiple than others in the industry have done, but it’s the largest as far as the growth that we could realize from it. We’d have to do a whole lot of tuck-ins to do what we have one in one move here.”
He is, perhaps, referring to the surprise huge acquisition in the enterprise software world of IBM’s blockbuster planned purchase of Red Hat for $34 billion. Pound-for-pound, it definitely seems that SAP is paying less than IBM did to achieve growth of its own.
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