Jarrad Zalkin, Principal of TM Capital, spoke with BusinessWeek about SAP’s M&A plans

March 15, 2010  – SAP Co-Chief Executives Bill McDermott and Jim Hagemann Snabe have pledged to quicken the pace of product introductions and dealmaking at the German software company as they try to reverse the sales decline that led to the ouster of their predecessor, Léo Apotheker.

SAP (SAP), the world’s largest maker of business applications software, is pushing a new engineering approach that is designed to get new products out the door faster, McDermott and Snabe told reporters and analysts on Mar. 15 at the company’s campus in Palo Alto, Calif.

The first fruit of that approach will be a new version of the company’s Business By Design Web software, a Web-delivered package of applications for small and midsized companies that McDermott said will arrive in July. The executives will also be “bolder” than their predecessors were in making acquisitions, he said.

“We’re off to a very fast start,” said McDermott, previously the company’s head of North American sales. McDermott promised to “radically speed up” the pace of innovation at SAP. “We haven’t stopped,” McDermott says. “As you can see, we haven’t slept either.”

Sales expected to rise 1% in 2010

McDermott and Snabe replaced Apotheker on Feb. 7. Under Apotheker—who served less than nine months in the top job—and previous CEO Henning Kagermann, SAP had been criticized for moving too slowly to deliver new products, as well as for a lack of clarity about technology that would make SAP software more accessible via the Web and mobile devices.

SAP revenue fell 13%, to $14.88 billion, last year. Sales are expected to rise 1% in 2010, to $15 billion, according to analysts surveyed by Bloomberg. And while SAP stock gained 37% during the bull market of 2009, the shares lagged a 52% surge in the Standard & Poor’s 500-stock index. SAP shares fell 8¢, or 0.2%, to 45.97 on Mar. 15.

Oracle (ORCL), SAP’s biggest rival, posted a 62.5% share-price gain over the past year as it benefited from aggressive acquisitions in recent years. During his remarks in Palo Alto, McDermott said SAP may move faster to acquire companies. SAP learned about integrating a large company from its $6.8 billion acquisition of data-analysis software maker Business Objects in 2007, he said. “Jim and I would not hesitate in doing an M&A transaction if it moved the company forward,” McDermott said. “We are a little bolder in our clock speed” than previous management had been, he added.

An “agile” method of development

Jarrad Zalkin, a vice-president at investment bank TM Capital who works on technology deals, says he believes McDermott and Snabe will follow through. He says Novell (NOVL) and privately held SAS Institute are among potential targets for SAP. McDermott and Snabe didn’t say which companies might pique SAP’s interest.

In an effort to step up the pace of development, SAP has moved 20% of its 12,000 engineers to what’s known as an “agile” method of development that employs small teams and rapid iterations of software to ensure that products hew to customers’ requirements, said Snabe, who pledged to “significantly accelerate our innovation.” For example, a new version of the company’s Business By Design software has been built using two-thirds as many engineers as a prior version occupied, requiring “hundreds” fewer people, Snabe said. SAP plans to bring its new engineering processes to “the entire development force” this year, he added.

The approach by McDermott and Snabe contrasts with Apotheker’s “sales focus,” says Chandrashekar Kakal, a senior vice-president at Infosys Technologies (INFY) who works with customers on SAP and Oracle projects. Other evidence of fresh thinking at SAP: Co-founder Hasso Plattner is getting more involved with management, and the company on Feb. 7 elevated Chief Technology Officer Vishal Sikka to its board. “These are all signals,” Kakal says, that SAP executives are “starting to get their act together.”

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