Sunday, October 14, 2007 / Companies / US & Canada - SAP warns surprise tactics might resurface / Companies / US & Canada - SAP warns surprise tactics might resurface

SAP warns surprise tactics might resurface
By Gerrit Wiesman

Published: October 14 2007 23:48 | Last updated: October 14 2007 23:48

Perhaps Henning Kagermann, the chief executive of German business software maker SAP, senses that catching investors off guard once could be construed as an accident, but that doing it twice could smack of carelessness.

In January, the world’s biggest maker of business software shocked the stock market when it announced that a new internet-based product for small companies would demand computer centres costing an unexpected €400m ($566m).

Last week, the company surprised again by appearing to give up on its strategy of growing organically when it bid €4.8bn ($6.7bn) for Business Objects, a Franco-US company specialising in corporate analysis software.

“Finding the right way to communicate is a challenge,” Mr Kagermann tells the FT.

“We don’t want to surprise the market too much. At the same time, we don’t want to be taken hostage so that we can’t react quickly anymore.”

Having watched SAP stock take a drubbing for the second time running after a big strategic announcement, he almost ruefully concedes: “We always try our best to master this challenge. But sometimes our efforts aren’t perfect.”

It is a delicate mea culpa that follows a week in which SAP shares closed at €39.51 in Frankfurt, 5 per cent below prices seen before the announcement last week of its agreed bid for Business Objects.

The punishment meted out by investors may have been a touch harsher in January, when shares fell almost 7 per cent. But the recent drop still stings.

“I didn’t expect to see such a big market reaction,” Mr Kagermann says.

But he is too self-assured and too convinced of his mission to do more penance than that.

As humbled as he may feel, his message throughout the rest of the interview is clear: “I don’t think we could have done it any other way.”

For one thing, he says stock market reactions in January and October were not comparable.

Investors knew SAP was working on a new so-called mid-market product, what surprised some was the cost of online availability.

“A year before [the announcement], I had flagged the fact that we no longer excluded on-demand solutions for [so-called] ERP [enterprise resource planning] applications,” he says – and it was only later that SAP could forecast the cost of the move.

Flagging a major acquisition would, to boot, have been counter-productive, he says.

“It wouldn’t have been very helpful to say, ‘We’re looking at acquisitions in this and this area’ because there weren’t that many targets around.”

Mr Kagermann stresses that investors are wrong to see an end to SAP’s organic-growth strategy: It will continue in the core areas of providing the software spine to big corporations, and addressing the needs of smaller companies.

“The business user segment is a different field,” he says. A fast-growing segment in which SAP was not market leader, it called for a different approach.

“We want to buy innovation,” he says, signalling an appetite for more.

At the same time, he says SAP is not embarking on an acquisitive strategy in this field akin to its American rival Oracle.

It has spent $31bn in the three years to buy rivals and consolidate the various markets it is in.

The top priority now is to integrate Business Objects. Mr Kagermann hopes this will be done by 2009.

“By then we should have been able to convince the market that this was the right decision,” he says.

But he cautions: “You can’t pass up opportunities just because you feel you need a quarter or half a year to prepare for them.”

Perhaps he fears that shocking shareholders a third time would appear deliberate. Now they have been warned.

Copyright The Financial Times Limited 2007

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