SAP/Qualtrics: valuation is a victim of market history in the making

Wheeling and dealing is a lot more fun than takeover integration. That seems to be the lesson from SAP’s rollercoaster ride with Qualtrics.

The German software titan first acquired the Utah software start-up in late 2018 for $8bn in cash. On Monday, Qualtrics disclosed that private equity firm Silver Lake had made a $12bn bid in partnership with Canada’s largest pension fund.

This would appear more impressive if SAP had not floated a stake in Qualtrics in early 2021 at a $15bn group valuation. Amid the frenzy in growth stocks, Qualtrics at one point boasted a market capitalisation of nearly $30bn.

SAP justified its ownership of Qualtrics with the idea that its massive sales team would sell Qualtrics products to its big established client base. Qualtrics makes software that helps customers create surveys and analyse the resulting data.

Qualtrics grew quickly enough. In 2018, the company recorded $400mn in annual revenue. By 2022, that figure had hit $1.5bn. SAP’s efforts to become more cloud-based and lift the valuations of both businesses further have, however, fallen short.

The evolution of Qualtrics’ valuation shows how markets have changed their minds about high-growth, low-profit companies. SAP’s initial $8bn acquisition valued Qualtrics at roughly 20 times trailing annual revenue. The 2021 IPO was roughly at that same highly elevated price.

Silver Lake is looking to pay well under 10 times trailing annual revenue. As for profits, Qualtrics forecasts an operating margin for 2023 of just 10 per cent. That is on an adjusted basis which suppresses a massive stock-based compensation expense.

SAP is in a position to sell Qualtrics for a higher price than it paid. Securities filings show that SAP also wrung out a $2bn dividend from the start-up.

Still, supplementary cash flows aside, big companies undertake blockbuster M&A to make big strategic leaps. If SAP merely sells after a few years for less than double Qualtrics’ purchase price, it should chalk the deal up to experience.