SAP AG has agreed to buy Business Objects SA for about €4.8 billion ($6.78 billion), a surprise move that breaks with SAP's traditional strategy of avoiding large company acquisitions.

The deal, announced in a hastily called press conference on Sunday evening, is designed to accelerate SAP's growth with the addition of thousands of new customers and a new product line to address the fast-growing market for business intelligence (BI) software.

"The biggest driver was definitely growing new business," SAP CEO Henning Kagermann said of the acquisition.

The deal will also allow SAP to integrate BI capabilities, which allow companies to analyze large amounts of data to improve business performance, more deeply in its own software applications, analysts said.

"The future of business applications, which of course are core to SAP's business, is being able to use them more intelligently, and buying a technology that allows its customers to do that is great for SAP," said David Bradshaw, a principal analyst with Ovum Ltd.

SAP has shied away from big acquisitions in the past, preferring to grow its business organically. In contrast, its main rival Oracle Corp. has added customers aggressively through more than 30 acquisitions in the past three years, including PeopleSoft and JD Edwards.

SAP has always been critical of Oracle's strategy, saying the company can't manage several different product families effectively. In fact, Oracle's acquisition strategy is paying off for the company in some respects, said Bo Lykkegaard, a research manager with IDC.

"Despite what you might think about this patchwork of different codebases, to a certain degree it has played out very well for them," he said. For example, Oracle has accelerated the sales growth for some of the smaller product lines it has purchased, he said.

In April Oracle said it would pay US$3.3 billion to buy Hyperion Solutions, a smaller rival to Business Objects focused on finance management and reporting. Many of Hyperon's customers were also SAP customers, and SAP may have felt it was time to stave off Oracle's encroachment on its turf.

"Hyperion's customer base has been very strongly on SAP, and reporting on SAP data. Those customers are in Oracle's hands now, and that can't be a comfortable situation for SAP," Bradshaw said. He predicted that SAP will work to improve the financial capabilities in Business Objects' software to counter Oracle's acquisition of Hyperion.

SAP will continue to offer Business Objects' software as a standalone product line, and Business Objects will operate independently inside of SAP, Business Objects CEO John Schwarz said.

But the companies will also integrate their software more tightly together in future products. "This business intelligence solution will be available in a more integrated fashion for the SAP customer, and in a stand-alone manner for the non-SAP customer," Schwarz said.

Kagermann declined to provide any detailed product plans Sunday, noting that the acquisition is not yet closed. The deal has been approved by both companies' boards of directors and it expected to close in the first quarter next year, subject to approval from Business Objects' shareholders.

The acquisition will help SAP to reach an ambitious goal of doubling its customer base to 100,000 by 2010. Schwarz said about 40 percent of Business Objects' customers are using SAP today. Business Objects has roughly 45,000 customers, suggesting SAP will gain about 27,000 new customers through the deal.

SAP has made some progress with its own business intelligence software, including an analytics engine called BI Accelerator. But Business Objects excels in ease of use and user interface technologies, which will become increasingly important to BI in the future, IDC's Lykkegaard said.

"Business intelligence in the future will increasingly become a user interface for applications," he said. "You'll do your analysis from the BI interface and then dive directly into the transactional data you want to examine."

Combining the companies' products lines will be an important part of getting the most from the acquisition, Bradshaw said.

"Both businesses can continue to operate independently, but the real value-add comes from them working together to take the data in business applications and 'operationalize' it much more, so people aren't just presented with core data, they're presented with insight and recommendations," he said.

Both companies have also been moving into software as a service. SAP could build a strong on-demand package by offering SAP Business ByDesign, its forthcoming hosted applications suite for the midmarket, alongside Business Objects' online reporting service, crystalreports.com.

While SAP's motives for the deal are clear, Business Objects' are harder to divine. Along with SAP it is one of Europe's last remaining world-renowned software companies. It has been growing strongly and always seemed staunchly proud of its independence.

Lykkegaard said the company may be hedging its bets against the wave of consolidation that continues to engulf the software industry.

"Business Objects has never had a credibility problem, but it's a consolidating industry and a lot of large companies want to shorten the list of vendors they do business with," he said. "Although Business Objects is a huge company, in a sense they are also a niche player, because IBM, Microsoft and Oracle are also on that short list."

(Peter Sayer in Paris and Marc Ferranti in New York contributed to this report.)

IDG News Service

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