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SAP to acquire Qualtrics

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Re: SAP to acquire Qualtrics

#11

Post by hyperpallium »

malshe wrote: post #3
devmunchies wrote: post #2

This is very surprising. They were prepping to go public for a couple years, even stacking their c-suite with ex-microsoft executives. (I left Qualtrics a year ago.)

I am baffled by the valuation. I use Qualtrics often for data collection but I never knew it was valued at multiple billions. What's their main revenue source? I don't believe that B Schools pay them so much to warrant this kind of valuation.

Acquisitions are sometimes strategic, i.e. it's not what they are doing, but what they will do. It's now accepted that you can lose to startups, and (like bugs), it's cheaper the earlier you nip the acorn in the bud (to clash metaphors). It can indicate the acquirer's own opinion of their competitive vulnerabilities.

Re: SAP to acquire Qualtrics

#12

Post by CapnCrunchie »

malshe wrote: post #3
devmunchies wrote: post #2

This is very surprising. They were prepping to go public for a couple years, even stacking their c-suite with ex-microsoft executives. (I left Qualtrics a year ago.)

I am baffled by the valuation. I use Qualtrics often for data collection but I never knew it was valued at multiple billions. What's their main revenue source? I don't believe that B Schools pay them so much to warrant this kind of valuation.

They sell to enterprises. They have customers like BMW, Southwest, etc. They get MBAs to learn to use them in school, then when they have to use a product when they get a job at a fortune 500, they go with Qualtrics since they know how to use it. That's how they got a lot of market penetration.

Re: SAP to acquire Qualtrics

#13

Post by twtw »

I found this excerpt from their S-1 interesting:

> We use open source software in our platform that may subject our platform to general release or require us to re-engineer our platform, which may harm our business.

> We use open source software in our XM™ Platform and expect to continue to use open source software in our platform in the future. There are uncertainties regarding the proper interpretation of and compliance with open source software licenses. Moreover, we cannot assure you that our processes for controlling our use of open source software in our XM™ Platform have been or will be effective. Consequently, any of these circumstances could result in reputational harm and harm to our business and results of operations. In addition, if the license terms for the open source software we utilize change, we may be forced to re-engineer our platform or incur additional costs to comply with the changed license terms or to replace the affected open source software. Although we have implemented policies and tools to regulate the use and incorporation of open source software into our XM™ Platform, we cannot be certain that we have not incorporated open source software in our platform in a manner that is inconsistent with such policies.

Can someone more familiar with these filings comment on whether this is typical, or is this corporate speak for "we are violating the GPL and hope no one can prove it?"

Re: SAP to acquire Qualtrics

#14

Post by adventured »

twtw wrote: post #9

> acquire all outstanding shares of Qualtrics for US$8 billion in cash 2017 profit of $2.6M on revenue of $290M. Please ELI5, how does someone decide on a price 26x higher than earnings? EDIT: 3077x earnings - thanks 'adventured.

> how does someone decide on a price 26x higher than earnings?

That's 3,077x earnings. $2.6m vs $8b. 26x would be a great price in this market.

For the same reason Facebook paid a billion dollars for Instagram, with zero revenue (or Google & YouTube). Aggressive speculation on the future outcome (growth) of what they're buying. They're plausibly betting Qualtrics might be a $3b sales division some day, yielding $500m in profit, or similar. They're willing to pay up now for those hopeful future profits, to take them off the market before a competitor does or Qualtrics gets far larger and more expensive in the future. Definitely a very rich premium they're paying (from SAP's side, it's equivalent to two years of their after-tax profit).

Re: SAP to acquire Qualtrics

#15

Post by twtw »

adventured wrote: post #14
twtw wrote: post #9

> acquire all outstanding shares of Qualtrics for US$8 billion in cash 2017 profit of $2.6M on revenue of $290M. Please ELI5, how does someone decide on a price 26x higher than earnings? EDIT: 3077x earnings - thanks 'adventured.

> how does someone decide on a price 26x higher than earnings? That's 3,077x earnings. $2.6m vs $8b. 26x would be a great price in this market. For the same reason Facebook paid a billion dollars for Instagram, with zero revenue (or Google & YouTube). Aggressive speculation on the future outcome (growth) of what they're buying. They're plausibly betting Qualtrics might be a $3b sales division some day, yielding $500m…

> That's 3,077x earnings

Whoops. Thanks, updated.

Coming from experience with semiconductor companies years back, 3-4x earnings was a typical acquisition price. This speculation on growth is very interesting to me.

Re: SAP to acquire Qualtrics

#17

Post by tfehring »

twtw wrote: post #9

> acquire all outstanding shares of Qualtrics for US$8 billion in cash 2017 profit of $2.6M on revenue of $290M. Please ELI5, how does someone decide on a price 26x higher than earnings? EDIT: 3077x earnings - thanks 'adventured.

Because that represents cumulative revenue growth in the range of 100%-150% over three years (revenue was "over $100 million" in 2014 [0]) and it's not difficult to get to a high DCF valuation by (over?)extrapolating exponential growth at those types of rates. The absurd P/E ratio is arguably less relevant because expenses scale well for SaaS businesses.

Slightly more cynical answer: Big companies like SAP are bad at innovating, but their shareholders want to see growth. They have access to plenty of cheap capital, and buying companies that are actually innovating is one way to grow. Qualtrics and their bankers know this, and it means that they have all the leverage and can demand a premium. (Qualtrics's management may have also needed a premium to convince them to go work for SAP. I wouldn't blame them.) Also, there's a principal-agent problem: SAP's shareholders might be better off if SAP just returned the capital to them through dividends or buybacks and let them buy Qualtrics shares themselves, either in the private markets or after an eventual IPO. But SAP's management would rather manage a bigger company than a smaller one, and it doesn't look good for them to effectively throw up their hands and say they're all out of ideas.

I genuinely believe that there's some truth to both explanations, but your guess as to their relative importance is as good as mine.

[0] https://www.businessinsider.com/qualtrics-becomes-1-billion-...

Re: SAP to acquire Qualtrics

#18

Post by Maxious »

twtw wrote: post #13

I found this excerpt from their S-1 interesting: > We use open source software in our platform that may subject our platform to general release or require us to re-engineer our platform, which may harm our business. > We use open source software in our XM™ Platform and expect to continue to use open source software in our platform in the future. There are uncertainties regarding the proper interpretation of and compl…

FWIW Pivotal's S-1 https://www.sec.gov/Archives/edgar/data/1574135/000104746918...

> Our use of open-source software could subject us to possible litigation or cause us to subject our platform to unwanted open-source license conditions that could negatively impact our sales.

> A significant portion of our platform incorporates open-source software, and we will incorporate open-source software into other offerings or products in the future. Such open-source software is generally licensed by its authors or other third parties under open-source licenses. There is little legal precedent governing the interpretation of certain terms of these licenses, and therefore the potential impact of these terms on our business is unknown and may result in unanticipated obligations regarding our products and technologies. If an author or other third party that distributes such open-source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations. In addition, if we combine our proprietary software with open-source software in a certain manner, under some open-source licenses, we could be required to release the source code of our proprietary software, which could substantially help our competitors develop products that are similar to or better than ours.

> Our products are based in large part on open source provided under the Apache License 2.0. This license states that any work of authorship licensed under it, and any derivative work thereof, may be reproduced and distributed provided that certain conditions are met. It is possible that a court would hold this license to be unenforceable or that someone could assert a claim for proprietary rights in a program developed and distributed under it. Any ruling by a court that this license is not enforceable, or that open-source components of our products may not be reproduced or distributed, may negatively impact our distribution or development of all or a portion of our products. In addition, at some time in the future it is possible that the open-source cores of our products may be distributed under a different license or the Apache License 2.0 may be modified, which could, among other consequences, negatively impact our continuing development or distribution of the software code subject to the new or modified license.

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