The problem with acquisitions is that they’re always meant to add revenue and drive synergies with existing lines of business, but all too often the acquisition falls short of its original goals. Some turn out to be bad deals, or even worse: Ask HP about Autonomy (or Compaq, or Palm, or EDS, for that matter). Or Microsoft about Nokia. Or SAP about Sybase. Or Oracle, which just recently finally killed off Sun, closing a chapter on one of its biggest, and dumbest, acquisitions.
I always joke that when I’m ready to retire I’ll first write a book entitled Josh’s Extremely Thin Book of Successful Acquisitions. It’s going to be really thin and it’s going to piss off a lot of people. In truth, I’ve been writing that book my whole career, as I have watched too many deals enrich investors and shareholders (usually a select few) and none others – not the employees, not the partners, and certainly not the customers. And that’s before there’s any attention paid to whether the acquisition is accretive, as in being worth more than its cost, as well as synergistic, as in acting as a revenue multiplier when sold in conjunction with other software and services.
And while there are definitely acquisitions that are accretive, or at least not too decremental, by all objective measures most acquisitions, even the ones that seem to go well, are plagued by the synergy problem. Sure, apply a little accounting legerdemain and the acquisition looks like its driving a healthy revenue stream to the bottom line. But the reality of what’s happening in the field, where all the great ideas in marketing go to die, (the title of another career ending book I want to write) isn’t all that healthy. The fact is that most vendors struggle to achieve the synergistic potential for their strategic acquisitions, especially the potential that was in the marketecture slides when the deal was announced.
Let me pick on SAP for a minute, though they are hardly alone in this lack of synergistic success. SAP has made some pretty big cloud bets recently, and two of them, unfortunately for SAP, its customers, and partners, are exemplars of the synergy problem. True, the two acquisitions have been successful by most measures, but their synergistic value – that’s a different story.
SAP closed the Ariba and SuccessFactors acquisitions 2012, and the synergistic potential for both was huge. Ariba was one of the biggest of the indirect procurement vendors, but, more importantly, it was the heir to a dotcom vision of the global business network (remember the term net markets?) that would have leveraged SAP’s enormous customer base and built an interconnected commerce market that spanned the globe.
The Ariba acquisition, on paper, meant that SAP could take a procurement network with thousands of suppliers, many of them already SAP customers or active suppliers to SAP customers, and bundle the whole lot into an online, interactive, global commerce network where everyone could source, buy, supply, ship, track and trace, and otherwise move B2B commerce from its relatively dumb 20th century EDI origins into the 21st century’s vision of a connected global economy.
SuccessFactors was an even more straightforward opportunity: SuccessFactors HR + SAP Finance = competitive wins and major synergistic value. The acquisition was and remains a big deal for SAP: SuccessFactors was a pioneering HRMS SaaS company that not only injected some vital cloud DNA into a moribund on-premise culture, but also provided a perfect complement to the finance functionality built into SAP’s core ERP product line. And as that ERP line moved forward into the cloud via S/4 HANA – noch besser.
A half-decade later, and the contribution of these two acquisitions to SAP’s revenues is indisputable – though there are signs that SAP management thinks they could do better. But has either brand really stepped up and optimized their synergy with the rest of the company’s products? The answer is no.
And that’s gotta hurt. For SAP, like every on-premise vendor transitioning to the cloud, any unrealized potential for cloud revenue growth is like a slow acting poison. Companies like SAP – companies that started on premise and moved to cloud – have an unhealthy reliance on maintenance revenue from their on-premise products, and the cloud has to become the place where revenue growth can be about more than getting customers to upgrade their on-premise systems. If these transitioning vendors can’t move their customers to the next shiny new thing – in most cases a synergistic collection of newly acquired assets and pre-existing or nearly developed in-house products – the poison eventually erodes the confidence of investors and customers, and the next IBM or HP is born: a pile of disconnected, disjoint assets that look connected and synergistic on a slide or two, but aren’t successfully sold that way, to the detriment of the vendors’ revenues and market clout.
That’s why it’s so important for these acquisitions to be truly synergistic: the HR and talent functions in a company should be connected to finance, and the rest of what we still call ERP, as a prerequisite to any effective digital transformation – and the more customers do this the better it is for all, customers and SAP alike. As to the vision of a global business network: making Ariba the hub for the myriad transactions and data that constitute the backend of B2B commerce would represent another huge digital transformation potential for customers, and a huge revenue uptick for SAP.
The reason why this kind of synergy isn’t happening, both for SAP and others, is complicated. This is the problem with the synergy effect: its looks good on paper, and in presentations to analysts. But if the vendor’s reflexes aren’t tuned to delivering a message about how 1+1=3 or more, then the acquisition may plug a revenue hole, but it won’t be able to realize anywhere near its potential.
I’ll explore the reasons why the synergy effect isn’t happening for major enterprise software vendors, and where companies can start looking for solutions, in next week’s post.