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.

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