SAP Boosts Cloud Shift with Deal To Acquire Ariba

Software giant SAP doesn't get much recognition when it comes to the topic of cloud computing, but it's not for lack of trying. The company last week used its annual Sapphire conference in Orlando to talk up some new SaaS initiatives, including new pairings from its recent $3.4 billion acquisition of human capital management provider SuccessFactors, a pact with Amazon Web Services to support SAP's Business All-In-One and Business Objects software on the EC2 cloud service, and plans to offer SAP's Sybase Afaria mobile device management platform on the AWS Marketplace.

But the big news came Tuesday when SAP said it is shelling out $4.3 billion to acquire Ariba, which operates the giant B-to-B cloud-based supply chain management network. Ariba gained fame in the late 1990s with its supplier relationship management (SRM) platform, which matches those procuring goods with sellers. SRM networks helped level the playing field and reshape the economics of supply chain management once defined by costly legacy electronic data interchange (EDI) networks.

Ariba's global trading network has 5 million paying subscribers among 60,000 customers and grossed $444 million in its 2011 fiscal year, up 50 percent over 2010. Ariba claims its trading network automates more than $319 billion in transactions and provides intelligence on over 730,000 companies. SAP said 190,000 companies use its ERP and CRM software. Executives at both companies pointed to customers who use Ariba's SRM network such as Deutsche Bank, ExxonMobil and Walt Disney. Walt Disney, for example, conducts more than 900,000 transactions per year with over 7,000 suppliers.

"This is a game-changing opportunity for SAP that complements and accelerates our existing on-premises core business software as well as our cloud offerings," said SAP Co-CEO Bill McDermott during an investor conference call held Tuesday to announce the deal. "The acquisition of Ariba will also advance us significantly toward realizing 2 billion in cloud revenues in 2015."

Yet that $319 billion transacted by Ariba is only a small fraction of the opportunity, McDermott said, estimating that the top 2,000 businesses spend $12 trillion per year from their suppliers. "We have a unique opportunity to significantly expand this business," he said.

SAP, which expects the deal to close in the third quarter pending shareholder and regulatory approvals, said it will operate Ariba as a separate division and will continue to support connectivity to applications from competitors such as Microsoft, NetSuite and Oracle. Interarbor Solutions analyst Dana Gardner said in a blog post that SAP would be wise to not favor its own ERP apps at the expense of others on Ariba's network.

"SAP should keep its ERP products and tactics separate from Ariba, and allow users to adopt a cloud-first approach, regardless of their on-premises or private cloud technologies," Gardner said. "Clearly, SAP is focused on global cloud growth opportunities, but is wisely defining cloud as a place to do business and extend socially amplified discovery and collaboration efficiencies. Business returns on cloud services may well come more from enabling new business processes across organizational boundaries, than in retrofitting older software as services. SAP will also be able to make more alliances with the next generation of ISVs through an Ariba community approach."

While SAP plans to operate Ariba separately, executives on the investor call said the company sees an opportunity to improve the platform by deploying the SAP HANA in-memory data processing engine.

"We will bring the [HANA] technology into the Ariba stack," said SAP Co-CEO Jim Hagemann Snabe on the investor call. "We will bring the analytics and with that enable companies to better understand their spending, their selection of suppliers, et cetera. We see an opportunity to use applications on top of HANA to bring supply chain management optimization across enterprises and not just within enterprises, which will be a whole new category."

Indeed, this deal looks like it has a lot of upside for SAP. While SAP has shelled out nearly $8 billion to acquire two leading cloud-based application providers, maybe it will even start to get some recognition as a cloud provider.

Posted by Jeffrey Schwartz on 05/24/2012 at 1:14 PM