Commentary

SAP Buys Experience Management Firm Qualtrics For $8 Billion

Question: If you were a pair of brothers on the verge of going public in a “hotly anticipated” IPO after building your data-collection company from scratch in your parents' basement in Utah, would you entertain an $8 billion offer to become part of a software company based in Germany that counts some of the largest corporations in the world as among its clients?

Ryan and Jared Smith answered in the affirmative late yesterday when they announced that SAP would be acquiring their Qualtrics International for $8 billion in cash. Qualtrics describes itself as an “experience management (XM)” firm that “focuses on obtaining and tapping the value of outside-in customer, employee, product and brand feedback.”

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“Qualtrics captures and analyses data on brands and products from real-time sources including social media and email, and should give SAP’s clients better insights into their own customers’ experience. SAP’s core strength lies in helping some of the world’s biggest firms run their finance, logistics and human resources operations,” Reuter’s Douglas Busvine reports.

“One person involved in the deal said it was the largest-ever takeover of a technology company on the verge of a market debut,” Busvine adds.

The Smith brothers founded the company in 2002 in Provo with their father, Scott, and Stuart Orgill, who resigned from the board last year. It  now has nearly 2,000 employees. Qualtrics competes with Survey Monkey, which raised $180 million in an IPO in September.

“Ryan Smith, the company’s CEO, was reluctant to do the deal. He went back and forth on the sale, leaving SAP unsure if it would get done until Sunday, according to a person familiar with the matter. While the $8 billion price had been agreed to weeks ago, Smith struggled with the idea of losing control of the company he founded, said the person. The Smiths owned 48% of total voting control, according to the IPO prospectus,” writes CNBC’s Alex Sherman.

In an interview with Forbes, Ryan Smith and SAP CEO Bill McDermott “said they’d gotten to know each other more closely over recent weeks, even as Smith pursued a road show he says was 13x over-subscribed. The two shared mutual customers such as Under Armour. The potential synergies between the company -- Qualtrics focusing on experience data, SAP on operational data -- made working together an easy prospect, says Smith,” Alex Konrad writes.

“I feel more at peace about this than going public,” Smith tells Konrad. “We didn't need to go public. We had no investor pressure, no financial pressure, and we had no employee pressure. We were going public for the sole reason of creating the category. And nothing is bigger for that than this combination. It would take 10 years to do what we are going to do tomorrow.”

“Smith is something of a fixture in a Utah startup scene that encompasses Ancestry.com, Insidesales.com and recently listed Domo Inc. His ardor for the Beehive State means Qualtrics is a supporter of such events as the Silicon Slopes Utah conference, which showcases local companies as well as the region’s snowboarding and skiing,” writeBloomberg’s Alex Barinka  and Mark Milian.

“You do not forget your first meeting with Ryan Smith,” Sequoia Capital partner Bryan Schreier wrote in a blog post, they report. “A go-to-market savant, Ryan complements his brother’s understated-engineer mindset. But they, their father Scott, and their co-founder Stuart, clearly have a shared set of values.”

Making money is one of them.

“Qualtrics turned a slight profit over the first nine months of 2018, and also claims to have been cash-flow positive for each of its 16 years,” Axios’ Dan Primack reports. “It had raised around $450 million in VC funding, most recently at a $2.5 billion valuation, from firms like Accel, Insight Venture Partners, and Sequoia Capital.”

“SAP is counting on the deal to bolster it in the customer-relationship management software business, or CRM, where Salesforce.com Inc. has the lead,” write Jay Greene and Rolfe Winkler for the Wall Street Journal

“The company intends to weave in the analytics capabilities of Qualtrics -- which offers surveys that companies can use to gauge customer feedback -- to help future product design as well as marketing efforts, SAP chief executive Bill McDermott said in an interview,” they add. “Right now, Salesforce is two to three times as large as SAP in the CRM market, said Stifel Nicolaus & Co. analyst Brad Reback.”

The deal, which has been approved by both companies’ boards, should close early next year. 

“Qualtrics is expected to maintain its leadership, personnel, branding and culture, operating as an entity within SAP’s Cloud Business Group,” according to the companies. Ryan Smith will continue as chief executive with dual headquarters in Provo and Seattle, Wash.

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