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SAP's Qualtrics Buyout

November 14, 2018

So by now many of you have heard the news: Qualtrics is being bought by Germany’s SAP for $8 billion in cash. I also received an email from Ryan and Jared Smith announcing the news. But what exactly did SAP get for its money?

 

For the first nine months of 2018, Qualtrics generated $289.57 million in revenue ($386 annualized), up 40% from a year earlier. It posted a $2.3 million operating profit in the same period ($3.0 million annualized), nearly double its year-earlier operating profit (but is still paltry). The SAP price values Qualtrics at 14x forward revenue (not earnings). Based on earnings and an $8 billion price tag, Qualtrics’ PE is 2700. SAP itself has a PE of 24. The market seems to like it; SAP shares were up about 3% today. But does this make sense?

 

There are only so many ‘large’ customers ($100K+ in fees a year) that can continue to fuel a 40%+ growth rate. Much will depend on how much running room Qualtrics gets from SAP. The love fest will last a quarter or two, but soon the vulture capitalists will get paid, the growth curve will flatten, and the cost accountants will swarm in. Then redundant positions (in sales, marketing, and support) will be eliminated. Prices will also go up, and the quality of support will decline, as staff reductions kick in and the acquisition costs weigh down SAP’s P&L. It's a familiar story.

 

Culture also matters. With SAP’s 95,000 employees and German influence, the Qualtrics hipster culture will fade. The relatively few Qualtrics employees can’t swim against the SAP tide for long. And there will be many companies that will now see Qualtrics as a conflict: those using Oracle, Microsoft, or Salesforce won’t want SAP snooping around, and thus they will hesitate. Many SMBs who may have considered Qualtrics will now have second thoughts, as they never envisioned bringing in such a behemoth.

 

The $8 billion price tag is an amazing achievement – congratulations to all. However, Qualtrics as a brand will persist only as long as SAP leaves it alone.

 

But it’s impossible not to play with that shiny new toy they just paid so dearly for.


 

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