On the evening lead­ing up to its sec­ond-quar­ter earn­ings call, SAP announced its inten­tions to take Qualtrics pub­lic. The press release stat­ed that Qualtrics is a mar­ket leader in the expe­ri­ence man­age­ment cat­e­go­ry. SAP main­tained the acqui­si­tion was a great suc­cess and Qualtrics has ​“out­per­formed our every expectation.” 

Even so, it took no time for the SAP ecosys­tem to spec­u­late on the rea­sons behind the deci­sion and what it could pos­si­bly mean for customers. 

ASUG reached out to sev­er­al indus­try ana­lysts and SAP watch­ers to get a bet­ter sense of what this busi­ness strat­e­gy shift means, what’s next, and what to keep an eye out as Qualtrics goes pub­lic. The announce­ment is so new that it is still too ear­ly to make defin­i­tive assess­ments, but it’s worth explor­ing all the same.

The Known Knowns About the Qualtrics IPO

What we do know is that SAP acquired the sur­vey plat­form near­ly two years ago for a whop­ping $8 bil­lion. We also know that soon after the acqui­si­tion, activist investor Elliott Man­age­ment Cor­po­ra­tion took a 1% stake in SAP, and soon after that, for­mer CEO Bill McDer­mott stepped down from his role and passed the torch to co-CEOs Chris­t­ian Klein and Jen­nifer Mor­gan. The year 2020 ush­ered in its own change when SAP announced that after only a few months with co-CEOs, Mor­gan would step down, leav­ing Klein as the sole CEO of SAP. Last, and although this didn’t make big news, Elliott Man­age­ment announced in May that it had sold 0.06% of its shares in SAP.

Are any of these facts alone rea­sons why a soft­ware giant like SAP would spin off its newest, shini­est acqui­si­tion? Prob­a­bly not. But togeth­er, they tell a very inter­est­ing story. 

Pen­ny for Your Thoughts on a Qualtrics IPO

There has been a lot of chat­ter about the moti­va­tion behind the Qualtrics spin­off. Diginomica’s Den Howlett wrote that he and Bri­an Som­mer predicted this would hap­pen in 2019. Som­mer, who is a senior con­sult­ing exec­u­tive assist­ing clients glob­al­ly in major ERP, HR, and finan­cial trans­for­ma­tion projects, shared his thoughts with ASUG regard­ing the recent announcement. 

“All this real­ly has roots back,” he said. ​“The modus operan­di of an activist share­hold­er is to take what they think is an under­val­ued asset and then try and find ways to improve its val­ue and return addi­tion­al cap­i­tal back to share­hold­ers.” Som­mer isn’t the only per­son point­ing to Elliott Man­age­ment as a decid­ing fac­tor in this move. 

“SAP incurred a fair amount of debt to buy Qualtrics,” said indus­try ana­lyst and SAP observ­er Josh Green­baum. ​“Look­ing at the bal­ance sheet as well as look­ing over their shoul­der at Elliott Man­age­ment, it makes sense that this was the move as they looked for­ward.” But he also cau­tioned that there is more to the story. 

“I think fun­da­men­tal­ly two things were hap­pen­ing,” he added. ​“One, I think that the cul­ture fit was a strug­gle. Two, I think it was dif­fi­cult to take the large-scale con­cepts behind Qualtrics and trans­late them in a way that enter­prise buy­ers could understand.” 

A source from a glob­al invest­ment analy­sis firm that cov­ers SAP agreed and added: ​“Qualtrics just nev­er real­ly sat well with­in the SAP port­fo­lio. Our view, and that of the CEOs we have spo­ken to at least, has always been that Qualtrics was only ever going to per­form as well as it could in its own light. SAP was not pro­vid­ing any synergies.” 

Tim­ing Is Every­thing When Mak­ing Strate­gic Moves

We asked if this was the right move for SAP to make, espe­cial­ly as the world econ­o­my is expe­ri­enc­ing such uncer­tain times. Som­mer stat­ed that he thought it was a good move because it essen­tial­ly frees up cap­i­tal for the soft­ware com­pa­ny that could go back to share­hold­ers while still pro­vid­ing SAP the oppor­tu­ni­ty to retain major­i­ty con­trol of a plat­form that is profitable. 

The source from a glob­al invest­ment analy­sis firm that cov­ers SAP (and who wished to remain anony­mous) dis­agreed and said, ​“I don’t think it was a strate­gi­cal­ly sen­si­ble move at all. If any­thing, it shows that acquir­ing Qualtrics in the first place wasn’t the right move.”

It’s not easy to state with absolute cer­tain­ty one way or the oth­er, con­sid­er­ing the IPO hasn’t hap­pened yet. And the ulti­mate con­se­quences of such a move — intend­ed or not — still need to play out. 

Sven Rin­gling, HXM strat­e­gy advi­sor at Adessa Group, said it was just too ear­ly for him to make a call. ​“Every­thing we are dis­cussing right now is guess­work,” he said. ​“But if what results out of this is that Qualtrics can work with oth­er major CRM ven­dors and that the mon­ey that comes in goes back into the prod­uct, then I believe the move will have been a good idea.” 

Green­baum, how­ev­er, sees a bit of both sides of the coin. ​“I think that to sell it off com­plete­ly would have been a big admis­sion of fail­ure,” he said. ​“It would have actu­al­ly poten­tial­ly dimin­ished the price because it would look like a fire sale. A par­tial IPO is more a face-sav­ing posi­tion for SAP. I’m guess­ing the IPO is also a nod to the Qualtrics man­age­ment, which doesn’t want to be sub­sumed in an acqui­si­tion again after a two-year ride.”

What Does a Par­tial IPO Even Mean? 

A par­tial, or minor­i­ty, IPO allows a par­ent com­pa­ny to offer shares of its sub­sidiary to the pub­lic to raise cap­i­tal while pre­serv­ing the par­ent company’s major­i­ty stake. This arrange­ment can allow the par­ent com­pa­ny to unlock the val­ue of the sub­sidiary while cre­at­ing greater inde­pen­dence for the subsidiary’s board of direc­tors. In addi­tion, because the par­ent com­pa­ny remains the major­i­ty share­hold­er, the sub­sidiary is insu­lat­ed from hos­tile takeovers.

In this case, SAP is main­tain­ing major­i­ty con­trol, while Qualtrics CEO Ryan Smith is said to main­tain the largest sin­gle share­hold­er stake. That means the num­ber of shares made pub­lic is going to be small. 

Accord­ing to Som­mer, SAP is like­ly going to use two class­es of stock mod­el. ​“There will be Class A shares, which include vot­ing stock, and Class B shares, which will be non­vot­ing stock.” He added, ​“The genius of this is that although ​‘the why’ behind it could have come from a num­ber of dif­fer­ent fac­tors, the deal is prob­a­bly being done in such a way to shore up the cash bal­ance and the val­ue of the SAP stock.” 

Morn­ingstar equi­ty ana­lyst Julie Bhusal Shar­ma put out a report stat­ing that although SAP has yet to reveal a float rate for the IPO and dis­close when this will occur, Morn­ingstar expects only mar­gin­al impact to SAP’s long-term tra­jec­to­ry. ​“The Qualtrics spin­off would leave SAP the major­i­ty share­hold­er — with SAP claim­ing it would not be far off from typ­i­cal float rates of 10 – 15%. As a result, the spin­off should affect SAP’s fore­casts min­i­mal­ly, as we also expect it to allow SAP to have deep­er rela­tion­ships with clients oth­er than SAP. The deci­sion to spin off Qualtrics was large­ly attrib­uted to more auton­o­my for Qualtrics.” 

Green­baum cau­tioned that who will ben­e­fit from the IPO is yet to be deter­mined. ​“From what I under­stand, in order to have an active­ly trad­ed stock, you need a lot of shares avail­able. With SAP and Smith in con­trol of more than the major­i­ty, the ques­tion becomes real­ly, ​‘What is left for the gen­er­al public?’” 

The Chal­lenges of a New Rela­tion­ship Between SAP and Qualtrics 

Dis­cussing num­bers and the bot­tom lines for soft­ware giants and investors is one thing. But ulti­mate­ly, what does this mean for SAP and Qualtrics cus­tomers? Our source at a glob­al invest­ment analy­sis firm that cov­ers SAP stat­ed that there like­ly won’t be any sig­nif­i­cant chal­lenges in exe­cut­ing this new rela­tion­ship between SAP and Qualtrics, ​“because there just isn’t a lot of inte­gra­tion or overlaps.” 

UpperEdge — a com­pa­ny that spe­cial­izes in help­ing orga­ni­za­tions max­i­mize val­ue from their key infor­ma­tion tech­nol­o­gy rela­tion­ships — how­ev­er, penned a blog cau­tion­ing cur­rent and future SAP C/4HANA and Qualtrics cus­tomers to ask them­selves three major ques­tions: ​“How much con­trol do I have regard­ing how my agree­ment gov­erns Qualtrics?”; ​“If I am con­sid­er­ing a major invest­ment in Qualtrics or the SAP C/4HANA suite, should I buy now or wait until the IPO?”; and ​“How does all of this fit into my plans to migrate from SAP ECC to SAP S/4HANA?”

Diginomica’s Jon Reed said, ​“I don’t see much impact for cus­tomers who are pur­su­ing SAP S/4HANA and/​or Qualtrics as large­ly sep­a­rate prod­ucts. If any­thing, this could accel­er­ate Qualtrics’ own prod­uct enhance­ments.” He echoed the sen­ti­ment from UpperEdge how­ev­er, and advised, ​“For cus­tomers look­ing at com­bined road maps, e.g., Qualtrics and SAP C/4HANA, or Qualtrics and SAP Suc­cess­Fac­tors, I’d be look­ing to put ques­tions to SAP soon­er rather than lat­er on how this affects those plans. In the­o­ry, this news shouldn’t impact any of those planned Qualtrics/​SAP inte­gra­tions, but it’s fair to put that ques­tion direct­ly to SAP. This should not stop SAP from exe­cut­ing on any of those inte­gra­tions, but any change like this war­rants clar­i­fi­ca­tions and specifics from the vendor.”

ASUG CEO Geoff Scott not­ed that, so far, he hasn’t heard from many ASUG mem­bers about the announce­ment, but it doesn’t mean there aren’t plen­ty of ques­tions from SAP cus­tomers brew­ing. ​“As we’ve done for near­ly 30 years and most recent­ly with the SAP licens­ing and indi­rect-access sit­u­a­tion, we will con­tin­ue to lis­ten to our cus­tomers, bring that feed­back to SAP, and come out with answers and direc­tion on the oth­er side for our mem­bers,” Scott said. ​“Qualtrics is a qual­i­ty prod­uct, and we need to ensure that SAP and Qualtrics cus­tomers will con­tin­ue to get the val­ue and ROI from the com­bined prod­ucts sets in the future.”

The Short- and Long-Term Effects of a Qualtrics IPO on SAP Expe­ri­ence Man­age­ment (XM)

How­ev­er the deal is struc­tured, there need to be assur­ances in place so that SAP, while main­tain­ing major­i­ty con­trol, gives Qualtrics the auton­o­my it needs to grow and cus­tomers the sup­port they need to be successful. 

Diginomica’s Reed chimed in and added, ​“The biggest poten­tial change is in SAP’s ​‘XM rev­o­lu­tion’ vision and out­look. After the Qualtrics acqui­si­tion, we heard an awful lot about ​‘Xs and Os,’ and how expe­ri­ence man­age­ment would rev­o­lu­tion­ize trans­ac­tion­al sys­tems. At this year’s SAP­PHIRE NOW, that talk was already toned down dra­mat­i­cal­ly. I agree with SAP back­ing off such extrav­a­gant talk, espe­cial­ly giv­en that the SAP prod­uct line and Qualtrics were hard­ly deeply inte­grat­ed when the XM hype was at its high­est. How­ev­er, I would per­son­al­ly be dis­ap­point­ed if SAP backed off from embed­ding Qualtrics in its prod­uct line.

“In my view,” he con­tin­ued, ​“the notion of expe­ri­ence man­age­ment was most inter­est­ing in areas like Inter­net of Things (IoT) and sup­ply chain, with machines com­mu­ni­cat­ing feed­back in action­able ways. It all depends on how deep SAP was plan­ning to go. Back­ing off from sur­vey man­age­ment is no big deal. Back­ing off from sen­so­ry and sen­ti­ment feed­back is a big deal. If I were SAP, I’d back off the expe­ri­ence man­age­ment talk, but qui­et­ly go about the busi­ness of try­ing to make good on some of those goals. After all, trans­ac­tion­al ERP sys­tems are almost at com­mod­i­ty sta­tus. It’s what you do with that data that pri­mar­i­ly dic­tates the val­ue of those investments.” 

To date, SAP has invest­ed heav­i­ly in inte­grat­ing Qualtrics with­in SAP Suc­cess­Fac­tors. ​“It makes the most sense there,” SAP observ­er Green­baum said. ​“But there are oth­er areas in which mea­sur­ing expe­ri­ence is impor­tant, par­tic­u­lar­ly the busi­ness net­work space.” Oth­ers agreed that this could be an oppor­tu­ni­ty for SAP to shift its focus from sell­ing Qualtrics to inte­grat­ing Qualtrics. ​“SAP now can prove that it is seri­ous about the inte­gra­tion road map,” Adessa Group’s Rin­gling said. ​“It will keep SAP on its toes.”

What’s Next as SAP Gets Ready to Take Qualtrics Public? 

As we stat­ed ear­li­er, this entire dis­cus­sion is spec­u­la­tive — it’s still too ear­ly to real­ly know what will hap­pen, how it will hap­pen, and what will be the result of it all. What we know for sure is that there hasn’t been a short­age of excit­ing news com­ing out of SAP this year, and we’re just bare­ly halfway through it. 

“There are always ques­tions over mate­r­i­al change of con­trol and this is no dif­fer­ent,” said Diginomica’s Howlett. ​“The fact that SAP is main­tain­ing a com­mit­ment to R&D is wel­come, but at the end of the day this is a par­tial spin­off with all the caveats that apply.” 

Som­mer cau­tioned to keep curi­ous about the broad­er pic­ture. ​“Very few peo­ple have giv­en much atten­tion to the kinds of dis­cus­sions hap­pen­ing in the board­room that would lead to a deci­sion like this,” he said. ​“It’s impor­tant to put it into that con­text first before sim­ply focus­ing on the down­stream effect.” 

Regard­less of the ques­tions that come up, this is an inter­est­ing announce­ment com­ing out of SAP, and one that ASUG will con­tin­ue to mon­i­tor as more facts become available. 

ASUG mem­bers can join us for dis­cus­sions like this with ASUG lead­er­ship at one of our vir­tu­al ASUG Exec­u­tive Exchange events to learn and net­work with oth­er exec­u­tives look­ing to get more val­ue from their SAP systems.