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SAP's $8 Billion Bet on the CRM Market

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German business software vendor SAP SE (SAP - Free Report) is buying market-analytics startup Qualtrix International for $8 billion, including unvested employee bonuses and balance sheet cash. The company has raised around about $7.93 billion to cover the purchase price and related costs.

SAP will integrate the business into its Cloud Business Group and retain co-founder Ryan Smith (who was the most reluctant to go through with the deal) as its CEO.

Qualtrix was on the verge of going public in an oversubscribed IPO that would have raised around $5 billion.

Now, Ryan Smith and his father will make about $3.3 billion from their 48% share in the company. Venture firms Accel Partners (16% share), Insight Venture Partners (15%) and Sequoia Capital (9%) will make $1.5 billion, $1.35 billion and $910 million, respectively.

Qualtrix makes money by charging customers on a subscription or on-demand basis for its experience management (XM) tools that help companies gather customer feedback and use it to optimize their products. It has 9,000 customers including BlackRock, Kellogg, Microsoft (MSFT - Free Report) , Mastercard (MA - Free Report) and Under Armour.

In the first nine months of 2018, the company grew its revenue 40% over 2017 while nearly doubling its operating profit.

The acquisition is expected to get SAP closer to its stated goal of challenging Salesforce (CRM - Free Report) , the company that has been synonymous with the customer relationship management (CRM - Free Report) software it created. Market research firm IDC says that Salesforce had a 19.6% share of the market in 2017, followed by Oracle (ORCL) with 7.1%, SAP with 6.5%, Microsoft 4% and Adobe (ADBE - Free Report) 3.2%. So Salesforce is well ahead of the others.

But SAP has a plan. Weakness in its traditional enterprise resource planning (ERP) business has driven it to the cloud where it is seeing huge growth. It now intends to integrate this ERP expertise with its CRM capabilities to offer a much more comprehensive solution, including better insights into customer procurement and supply chains, which in turn would lead to better inventory management, more efficient customer service (because of easier access to information) and therefore, greater customer satisfaction. It is betting on the fact that this solution will be better than Salesforce, which has famously focused on CRM alone.

There’s plenty of room for both to grow however: Gartner estimates that worldwide CRM software revenue amounted to $39.5 billion in 2017, overtaking DBMS revenue, which accounted for $36.8 billion. In 2018, it expects the CRM software market to remain the fastest growing (16%) and continue leading all software markets. Gartner expects GDPR to further accelerate spending on information security, CRM and customer experience (CX) in the next three years.

“It is critical that organizations are compliant with GDPR as soon as possible, or at the very latest 25 May, because when customers don’t trust an organization’s customer data protection, they put their own safeguards in place, like providing false data or closing accounts,” said Bart Willemsen, research director at Gartner. This reduces an organization’s chances of reaching the right customers with the right offers at the right time.”

“Poor CRM will lead to a privacy violation and a GDPR sanction. Application leaders need to enhance control over personal data usage throughout the data life cycle and safeguard processed personal data so that it is not used beyond the context of predefined and documented use cases.”


SAP shares carry a Zacks Rank #4 (Sell). But you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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