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Takeaway: SAP acquires Qualtrics for the Short-able Price of $8B

Corporate M&A Scorecard

Where is the scorecard for corporate M&A? IBM, for example, has acquired many cool technology companies. Where are they now? Investors aren’t given multi-year disclosures on various acquisitions to judge the short and long-term merit of ginormous cash outlays. We are supposed to assume the ‘Board’ will do its job and police wild spending by tracking the performance of acquisitions after the deals have closed. But, do they? How come there is never a board report made public? Other than watching companies write down acquisition value many years later, we don’t get to measure the success or failure of acquisitions. Maybe it is time the SEC creates a new category of disclosure for the performance of acquired companies. After all, we are the shareholders, and the Board is supposed to represent our interests and judge the performance of acquisitions. Are they?

XM Call Cancelled | SAP Can’t Resist Shiny Baubles - XM Revenue from Existing

The case for Qualtrics is fine. It is successfully pivoting from survey software towards data management platform. The problem is they are well along the journey for both capturing new and monetizing the base. Without monetizing the base, for example, the company would have grown 12% YTD on revenue from new.

XM Call Cancelled | SAP Can’t Resist Shiny Baubles - XM Customers

How far along are they on monetizing the base? Qualtrics has 635 top customers paying $350-360k per year. The other ~8,300 customers are paying ~$23k per year for the software. The largest customers seem to pay up to ~$2.5-3MM per year. Qualtrics already has 75% of the F100, 2/3rd of the F500, and 30% of the G2K.

XM Call Cancelled | SAP Can’t Resist Shiny Baubles - XM Comps

The problem? The richer they monetize the base, the more the solution stands out versus peers for the wrong reasons. The competitive field is stacked. There are many ‘just as good’ solutions at a fraction of the price. Qualtrics has won the hype cycle and the early revenue cycle but the low barrier nature of the field and the extensive competition would have always anchored pricing in the category. Further, we reviewed a case study of a large organization exiting Qualtrics (over price) and the exit process was not as difficult and the platform not as sticky as we would have believed.

XM Call Cancelled | SAP Can’t Resist Shiny Baubles - XM Gdoor1

This is the second time in 2018 we have seen SAP confuse glitter and gold. The other time was to put CallidusCloud on the corporate AMEX. One of the tools they acquired? A customer experience software (HERE). I guess that one wasn’t good enough, so they spent $8B more.

XM Call Cancelled | SAP Can’t Resist Shiny Baubles - XM Gdoor2

There is a lot of hype in Qualtrics. So much that if Ryan Smith leaves Qualtrics it will fizzle and be another write-down. If he stays, maybe he could be the next CEO of SAP…

XM Call Cancelled | SAP Can’t Resist Shiny Baubles - Qualtrics Cartoon Final

Please call or e-mail with any questions.

Ami Joseph

Managing Director

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Yosef Vaitsblit

Analyst

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