Behind-the-Scenes Software Giant Takes Center Stage
Where does the world’s largest software company go for software?
Microsoft goes to SAP, the German software giant that, at least in proportion to its size, is almost unknown on these shores.
In fact, the industry SAP dominates--enterprise resource planning, or ERP, software--is obscure to all but the big corporations that use the complex systems to automate their accounting, personnel, inventory and manufacturing operations.
SAP will take a big step toward raising its U.S. profile on Monday, when its shares begin to trade on the New York Stock Exchange.
Some technology analysts are already smitten. “Here’s a $4-billion [sales] company growing at 60% a year with great profitability, a 25-year history and an amazing roster of blue-chip customers,” said Jim Shepherd, vice president of AMR Research in Boston. “Some investors are going to say, ‘This is about the most attractive thing I’ve ever seen.’ ”
The Big Board is so delighted at snagging the listing for the world’s fourth-largest software firm that it is celebrating with an all-day “beach party” Monday on the street outside the exchange, trucking in palm trees and sand for a volleyball match and featuring music by Little Anthony & the Imperials and Kool & the Gang.
The hoopla is out of character for SAP, a buttoned-down organization full of PhDs in the dour science of operations research.
“They’ve been somewhat aloof because they haven’t had to answer to Wall Street analysts,” said Harry Pse of Yankee Group, a Boston research firm. “Now the risks go up--if you disappoint the Wall Street people, your stock may be punished much more severely than it would be in Germany.”
SAP--after the German words for systems, applications and projects--was founded in 1972 in Walldorf by five former IBM software engineers, including Hasso Plattner, the company’s current chief executive.
Its original product, R/1, was an accounting program. It was followed by R/2, a big-selling system for mainframe computers, and the current R/3 system, whose perfectly timed introduction in 1992 helped SAP capture the lion’s share of the fast-growing back-office market among Fortune 1,000 companies.
SAP controls about one-third of the $11-billion global market for ERP software. It’s a segment that AMR estimates will explode to $52 billion by 2002, as users plug more of their employees into existing systems, as more mid-size and smaller companies start buying the software and as growth spreads to Asia, Latin America and markets such as financial services, municipal government and health care, where current ERP sales are minuscule.
“If they do nothing but hold their share, they’re in awfully good shape--and we expect them to do more than hold their share,” Shepherd said.
SAP customers include IBM, Exxon, Toyota Motor and Northrop Grumman.
Analyst Neil Herman of Salomon Smith Barney, who rates the stock a “buy,” said that SAP has been competing aggressively, winning head-to-head contests with its top rivals, Oracle Corp., Baan Co. and PeopleSoft.
One dark cloud is Asia, where SAP reports that the dismal economic picture has caused businesses to postpone buying decisions. Although SAP’s second-quarter sales rose 59% year over year, Plattner warned last week that the pace would slow to 40% in the coming year.
SAP’s products are different from those of its rivals because its approach is different, said Yankee Group’s Pse. While American enterprise-software firms tend to offer products that “automate your existing system,” quirks and all, SAP sometimes requires a firm to revamp its whole way of doing things, he said.
“SAP insists on data consistency,” Pse said, so introducing its software can lead to “a very painful and political process” at some firms--especially ones where the sales force has traditionally held more power than the information-technology department.
When SAP is faulted, it is typically for being slower and more expensive than some of its smaller competitors.
For the NYSE, landing SAP was a major coup. The exchange is determined to lure more technology companies--the specialty of its archrival, the Nasdaq Stock Market. Nasdaq happens to be home to Oracle, Baan and PeopleSoft, among scores of other tech names.
Kevin S. McKay, chief operating officer of SAP America, said in an interview that SAP chose the NYSE because many of its customers are listed there. It also liked being able to choose its own “specialist” to handle its shares, and it felt the Big Board would give SAP “added prominence” in comparison with a Nasdaq listing.
“We’re not just another high-tech start-up,” McKay said.
SAP needed the listing to create “a level playing field versus our competitors,” McKay said. Because SAP reports its results in deutsche marks and under German accounting rules, customers have had trouble comparing its financial strength with that of, say, Oracle--an important consideration in buying very expensive systems meant to last many years.
With the NYSE listing, SAP also will report results in dollars and under U.S. accounting conventions.
Until now, SAP’s U.S. shares--actually American depositary receipts, or ADRs--have traded on the Nasdaq Bulletin Board, an electronic market that is mostly home to small and thinly traded issues. The NYSE listing will broaden the potential market for SAP shares, as some institutional investors--pension funds and the like--are barred from owning Bulletin Board stocks or restricted on ownership.
On Nasdaq, SAP shares have more than doubled so far this year, to $61 at Thursday’s close.
Increased availability of the stock also will attract more coverage by Wall Street analysts, who have largely ignored SAP.
“That visibility becomes a huge positive in getting new business, as they move into markets like higher education and municipal government, where they may not be known,” AMR’s Shepherd said.
Spiros Segalas manages the $3-billion Harbor Capital Appreciation Fund, which is SAP’s largest U.S. holder, with 1.3 million shares.
He doubts that the NYSE listing will cause much of a bounce in SAP shares Monday, because the stock has been trading in the U.S. for years and is already well known to many institutional money managers, and it’s fairly pricey, trading at upward of 70 times next year’s expected earnings per share.
Segalas thinks the nosebleed valuation is justified by SAP’s terrific growth prospects--35% to 40% annually, well into the future.
SAP’s price on the Big Board must more or less track its trading on the German DAX exchange, as each SAP ADR will represent one-twelfth of a share of SAP’s German preferred stock.
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German Juggernaut
SAP’s sales and earnings rose more than five-fold between 1993 and 1997, as the company’s software rocketed in popularity with companies worldwide. Results, in millions of dollars:
1993
Profit: 82
Sales: 623
*
1994
Profit: 159
Sales: 1,034
*
1995
Profit: 229
Sales: 1,523
*
1996
Profit: 320
Sales: 2,103
*
1997
Profit: 523
Sales: 3,399
Source: SAP
