SAP's Ariba Buy Opens New Front in Oracle Rivalry

Software company SAP AG's deal to buy Ariba Inc opens a new front in its battle with Oracle for the internet-based cloud computing market, raising the possibility of a counterbid from its arch rival.

May 23, 2012

* SAP plans to buy Ariba, deal values Ariba at $4.3 bln

* Comes a week after SAP said it banks on organic growth

* Oracle, IBM, eBay are possible rival bidders - analysts

* Shares down 0.7 percent, outperforms sector

(Adds shareholder comment from AGM, details)

FRANKFURT, May 23 - Software company SAP AG's deal to buy Ariba Inc opens a new front in its battle with Oracle for the internet-based cloud computing market, raising the possibility of a counterbid from its arch rival.

SAP, Europe's biggest business software maker, announced plans late on Tuesday to buy Ariba in a deal valuing the business and commerce network company at $4.3 billion.

Analysts said since many of Ariba's customers use Oracle services, there was good reason, and a precedent, to believe the U.S.-based Oracle might make a rival bid; in 2005, Oracle snatched retail software maker Retek away from SAP after a bidding war that reached $630 million.

International Business Machines, the world's largest technology services company, and e-commerce company eBay Inc could also be possible contenders.

"You never know. We will see. We think we paid a fair price, but you have to realise that there are few assets available in the world such as Ariba," SAP's co-Chief Executive Bill McDermott told journalists on Wednesday.

Though Ariba made a small loss last year, it boasts that more than 730,000 clients, including British Airways, Chevron and Tata Motors, use its services in activities such as procurement, contracts and cash management.

Arch rivals Oracle and SAP are both transforming themselves into major players in cloud computing - providing software, storage and other services from remote data centres over the Web - and reducing their reliance on traditional business software.

SAP announced the purchase of web-based software company SuccessFactors Inc late last year, while in February, Oracle agreed to buy Taleo corp, a maker of web-based software for recruiting employees, for about $1.9 billion.

Others said SAP's rivals might baulk at spending more than the $45 a share on offer, which was already a 20 percent premium to Ariba's closing price on Monday.

"That premium is not exactly small. The question is whether it is right to pay prices like that," a fund manager in Germany said, who holds SAP shares in his portfolio and who asked not to be named.

Ariba's shares closed at $44.87 on Tuesday, up 19.2 percent.

WHERE'S THE MEAT?

SAP's offer values Ariba at eight times estimated 2012 sales, which is more than SAP paid for SuccessFactors and Oracle for Taleo.

SAP shareholders voiced some concerns at the company's annual general meeting on Wednesday about SAP's cloud strategy, saying they did not want a repeat of the dotcom era when huge multiples were paid for loss-making start-ups.

"Where is the meat?" one shareholder asked management.

SAP has so far not made any money with the cloud business, and has said it couldn't promise the business would be profitable next year. But even after the Ariba purchase, it expects to widen its operating margin to 35 percent by 2015, from 33 percent last year.

The Ariba deal comes just weeks before Oracle CEO Larry Ellison is due to announce the Silicon Valley company's latest cloud software strategy, on June 6.

It also comes a week after SAP said it planned to expand its cloud computing business without further major acquisitions, sparking concern that its cloud strategy might be less than fully formed.

After buying SuccessFactors, SAP appointed the U.S. company's founder and Chief Executive Lars Dalgard to its executive board and put him in charge of SAP's overall cloud business. Ariba, however, will be run as a standalone business, separate from SAP's other cloud assets.

Asked whether there were more big buys in the pipeline, SAP co-Chief Executive Jim Hagemann Snabe said acquisitions were not at the heart of SAP's strategy but would only be used to kick-start certain businesses.

Deutsche Bank and JP Morgan advised SAP on the Ariba deal and are also arranging financing.

SAP said the transaction would be funded from free cash and a 2.4 billion euro term loan facility.

Shares in SAP were down 1 percent at 47.33 euros in high trading volumes by 1324 GMT, outperforming the STOXX Europe 600 Technology index, which was down 2 percent.

Officials at eBay, IBM and Oracle could not be reached to comment on speculation they might consider rival bids. (Reporting by Harro ten Wolde and Maria Sheahan; Additional reporting by Noel Randewich and Jim Finkle; Editing by Will Waterman)