In case you missed it, late Sunday night SAP announced that it’ll take Qualtrics public at some nebulous date in the near future. This is after SAP spent $8 billion in cash to acquire the company in late 2018, just days before Qualtrics was due to IPO.
This is rare. Buying and selling companies on short-ish timeframes is usually the domain of private equity firms. But even those firms are typically operating on 3-5 year time horizons, after making significant changes to the company. SAP is selling Qualtrics after 18 months – and the only meaningful change we can see is a significant increase in Qualtrics’ revenue.
Why Sell (Some of) Qualtrics?
Three plausible reasons we can think of for the IPO are:
Today, a lot of ink has been spilled about the potential financial upside of selling Qualtrics – this article and podcast from Tech Crunch are especially good. Essentially, Tech Crunch is saying that, with Qualtrics’ run rate of ~$800 million in annual revenue, SAP could reasonably expect a 17.3 times revenue valuation of Qualtrics – putting it at about $13.8 billion on an IPO.
Therefore, even with the eye-popping cash investment of $8 billion, SAP could stand to make a lot of cash just for having bought and held Qualtrics for 18 months (kind of like if you bought a house in 2009 and sold it last year, but on an even shorter timeframe). SAP will remain the majority stakeholder in Qualtrics (at what percentage, we do not know), so it won’t be getting all that cash – but the potential IPO still represents a significant cashflow infusion to its business.
This is all great and good, but we have to ask – Why does SAP want to sell Qualtrics now?
The first reason could be that SAP wants the cash. In today’s earnings call, the company mentioned a significant focus on cashflow in the midst of the pandemic (who is not looking at cashflow?!?). Selling part of Qualtrics generates a significant cash bunker for SAP. It may also be that SAP thinks that we’re in for a significant long-term economic downturn, but that cloud-based businesses are still highly valued, so this is a good time to sell if they are ever going to. They may also, as they said, want to invest in other “strategic initiatives” (like S4/Hana), so are looking to free up some money. No matter the reason, SAP can get a lot of cash – and everyone likes cash when the economy is tight.
Another reason could be a lack of leadership alignment. When SAP bought Qualtrics, it was very much a meeting of the minds between Ryan Smith, Qualtrics’ founder, and Bill McDermott, SAP’s CEO. Since McDermott left SAP last October for ServiceNow, there’s been volatility at the top: SAP moved into a co-CEO model with Christian Klein and Jennifer Morgan, with Morgan moving on this past April. It’s possible that the vision shared by Smith and McDermott for Qualtrics was fundamentally different than what has come to pass in the Klein era. Smith clearly still has a strong vision for Qualtrics, as reinforced by the fact that he’ll become the largest individual owner of the company (though, as stated above, SAP will be the largest institutional owner).
Finally, it may be that the realities of post-acquisition integration were just a harder road than anyone wanted to hoe. We all know that most acquisitions fail, and ones with significant cultural differences, even more so. SAP is a large, traditional organization. Qualtrics is a cloud-based start-up, with a very different culture. Those types of differences can lead to difficulties in everything, from alignment around customer integration to how they manage the partnership landscape to software and services integration. While I don’t know the details of what has happened, as analysts we can say that the integration of Qualtrics into core SAP SuccessFactors’ offerings has been slower than we would have expected, given SAP’s overriding focus on creating a “human experience platform.”
Throughout the last 18 months, Qualtrics has remained remarkably independent – a point Smith reinforced in the earnings call today. It may make more sense to cut Qualtrics loose now instead of forcing a post-acquisition integration that may not have been working as some in top leadership seats hope.
SAP reinforced that it’ll remain the majority owner of Qualtrics, and that it intends to continue investing in the “human experience platform,” marrying operational data with experience data (which it neatly calls X+O data). SAP also stated that it’ll remain Qualtrics’ primary R&D partner, which will benefit both organizations. Qualtrics may especially benefit, as there are some innovative start-ups in SAP’s start-up ecosystem. Therefore, we still expect to see a tight and beneficial relationship there, and hope that SAP is able to leverage some of the innovation Qualtrics can offer.
The IPO of Qualtrics will allow it to operate more independently, which may allow it to get back into important partnerships with either Oracle or Workday (depending on how close the relationship remains with SAP). It should also allow it to revert to its start-up cultural roots, in terms of how it attracts and retains talent, and how it operates on a day-to-day basis. Qualtrics’ partnership with SAP’s sales teams likely fueled some of its strong growth over the past 18 months, so the company may face some headwinds as it transitions back to its own salesforce. That said, Qualtrics developed a strong set of COVID-19 resources for customers and has cited those offerings as part of its success in the last few months. Qualtrics is likely to continue building on those successes as, unfortunately, the need for COVID-19 support is unlikely to go away soon.
Further, as we have noted in blogs across the last year, employee experience is a hot market. It’s now even hotter than before, with so many CEOs and senior leaders recently seeing the importance of understanding employee sentiment in light of the pandemic. Qualtrics is a market leader in this space. Even though it won’t have SAP directly behind it anymore, based on today’s earnings call, it seems that Qualtrics will retain some significant cash from this IPO to fuel its future growth. Therefore, we expect to see it continue to do very well in the future.
Net-net: This seems like a good, though unusual, deal for all.
What do you all think?
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