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SAP floats Qualtrics IPO 2 years after acquisition

SAP's decision to spin off Qualtrics in an IPO will likely benefit both companies, analysts said.

Less than two years after it spent $8 billion to acquire Qualtrics, SAP announced it's spinning off the experience management software provider in an initial public offering.

The objective of the Qualtrics IPO, which was announced ahead of SAP's earnings report for the second quarter of 2020, is to "fortify Qualtrics' ability to capture the full market potential with experience management," according to SAP.

SAP acquired Qualtrics in November 2018, four days before it was to go public with its own IPO. The acquisition immediately raised questions about the price SAP paid and how Qualtrics' cloud-based experience management (XM) software would fit into SAP's product portfolio. Qualtrics is seen as a pioneer in XM software, which is used to measure and analyze customer and employee sentiment about company products and services.

Then-SAP CEO Bill McDermott and Jennifer Morgan, who was named SAP co-CEO after McDermott's departure in October 2019, were seen as Qualtrics' main proponents inside SAP, said Forrester Research analyst Liz Herbert. Morgan also departed SAP in April.

"We sensed right from the get-go that there were differing opinions about the value of bringing Qualtrics into SAP, back when the original acquisition happened," Herbert said. "[We heard] there was not full agreement about whether that was the right move."

Herbert also said the spinoff IPO likely was influenced by activist investor Elliott Management Corp., which bought a $1.3 billion stake in SAP in 2019. Elliott's pattern is to persuade companies to focus on their core assets -- and spin off what the investor doesn't view as core -- which makes the Qualtrics IPO "not too surprising," she said.

A shift in focus

Joshua Greenbaum, principal with Enterprise Applications Consulting, said the Qualtrics IPO is not a divorce but a shift in focus led by CEO Christian Klein after the departures of Qualtrics' biggest advocates. Klein appears to be focusing on SAP's core business, which is largely based in Germany, according to Greenbaum.

"It was always a struggle to figure out how to tuck Qualtrics into the big picture of SAP," he said. "There was always a lot of potential synergy, but it was hard for people to break away from the idea [that] Qualtrics is just a survey tool mentality. So that combination of lack of obvious synergy and the need to consolidate the business really led to this moment."

Still, Qualtrics' business has been strong overall and there's a good chance that SAP will make some of the money from its investment, Greenbaum said.

"The numbers have certainly looked good quarter-by-quarter, and there's been an uptick in revenue," he said. "It's been a good decision on a pure business level, but integrating Qualtrics into the bigger picture of what SAP wants to be has been difficult and there are skeptics who will look at what Qualtrics does as enterprise navel-gazing."

The Qualtrics IPO may provide SAP with cash it can use for other important acquisitions, and allow both companies to focus on their core business, agreed Predrag Jakovljevic, principal industry analyst at Technology Evaluation Centers, an enterprise technology analysis firm in Montreal.

"Qualtrics really doesn't need SAP, as their R&D and sales were already pretty strong and they had a reputation as a best-of-breed in customer experience," Jakovljevic said. "But on its own, Qualtrics can sell to many other ecosystems. For example Siemens recently said that they like Qualtrics for PLM, for new product introduction sentiments by customers."

While the IPO will give Qualtrics the authority to run its own affairs, said Faith Adams, senior analyst at Forrester, the specter of SAP will remain for some.

"Qualtrics, unlike one of its main competitors Medallia, has not made any acquisitions since being acquired by SAP, so this move will free them up to be more in control to do more -- and faster, " Adams said. "That said, Qualtrics has benefitted from SAP in some cases and they were able to win deals that they normally would have lost. But the SAP relationship also hurt them in some cases, and SAP is not going away with the spinoff. So, these customers who were concerned about the influence will remain concerned."

Autonomy for Qualtrics but limited integration

Qualtrics, which declined to comment for this story, had already been operating with more autonomy than SAP's other cloud acquisitions, including SAP Ariba, SAP SuccessFactors, SAP Fieldglass and Concur. The current Qualtrics management team, led by CEO Ryan Smith, will continue to operate the company.

SAP made Qualtrics XM software a major part of its intelligent enterprise strategy, which is intended to help companies digitize existing operations and use data to transform processes and develop new business models.

The integration of Qualtrics' experience data ("X-data") and SAP systems' operational data ("O-data") is meant to help companies understand how customers and employees feel about products and services and respond accordingly. This intended "X-O" convergence in the SAP intelligent enterprise was heavily touted at events like SAP Sapphire Now 2019, but for a significant percentage of customers, the message isn't resonating.

SAP had begun Qualtrics employee experience integrations with its SuccessFactors HR application suite, as well as with its C/4HANA customer experience platform since it had acquired the Qualtrics voice of the customer cloud platform, Forrester's Herbert said. Since SAP plans to maintain a majority ownership of Qualtrics, those will likely continue. But spinning off Qualtrics, she added, allows the SAP board to focus on the much larger priority of getting more customers onto S/4HANA.

In interviews conducted prior to the Qualtrics IPO announcement, several SAP customers -- who also were Qualtrics users prior to the SAP acquisition -- said that SAP's integrations didn't affect how they were using Qualtrics or their buying decisions.

Qualtrics customer Autodesk Inc. has expanded its use of Qualtrics since the SAP acquisition, said CIO Prakash Kota. That happened more because of internal business drivers and not because Qualtrics came under SAP control.

The company is in the process of digitizing sales, back-end financial systems and employee experience as it also pivots to a SaaS subscription model for its popular CAD illustration applications. Autodesk used Qualtrics to measure user feedback to improve customer support center and downloading experience during that transition.

"We already had a Qualtrics footprint," Kota said. "You know with any big acquisition -- these things don't get integrated overnight; they take several years."

Another software company, the IBM-owned Linux OS vendor Red Hat, uses Qualtrics to measure and improve customer service and customer success. Nick Woerner, Red Hat's voice of customer manager, said that SAP's influence hadn't manifested itself.

"I haven't noticed any changes, short of some of the people we work with -- some of the names have changed," Woerner said. "From a product perspective, we're really pleased and haven't noticed any negative effects since the SAP acquisition."

Qualtrics key during pandemic

Despite the deep connections to other SAP technologies, Qualtrics XM software is also seen by SAP as an integral part of helping companies become more flexible and responsive in the wake of business disruption caused by the COVID-19 pandemic.

Voice of the customer tools, in general, have been key for businesses quickly spinning up digital equivalents of in-person processes on the customer and employee experience side of their businesses during the pandemic. On the CX side, the survey tools surface problems in the customer journey that can be more quickly addressed, and for employee experience, they've been a boon to transition on-site employees to remote work.

Red Hat used Qualtrics survey tools to spin up an online certification program for Linux developers and admins, Woerner said. The company also used Qualtrics survey tools as it figured out how to support customers during COVID-19 stay-at-home orders. One major discovery was that Red Hat needed to extend end-of-life periods for older versions of software set to expire, because its users didn't have access to their offices to install updates.

As the pandemic drives businesses to seek digital channels for customer feedback, the market for voice of the customer tools is heating up, with Microsoft expanding its offering last week. Herbert said that the coming Qualtrics IPO won't necessarily slow down integrations between it and SAP applications.

"There's nothing preventing integrations with C/4HANA from happening as Qualtrics and SAP work as an alliance, with Qualtrics as its own public company," Herbert said.

SAP currently owns 100% of shares and intends to remain the majority shareholder after the Qualtrics IPO. Final details of the timing and conditions of the Qualtrics IPO have not been set yet.

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