On November 11, 2018, SAP announced its agreement to acquire Qualtrics, a provider of customer and employee experience measurement, for $8 billion in cash. Qualtrics was set to IPO this week at a valuation of $5 billion with plans to raise $500 million. The company turned its first profit of $2.6 million in 2017 on revenue of just under $290 million. Qualtrics anticipated surpassing $400 million in revenue this year. Its key customer sectors include B2B technology, auto, travel and hospitality, financial services, government, media, airlines, and retail.

Key facts:

  • This is the second-largest purchase of a SaaS software company after Oracle’s acquisition of Netsuite for $9.3 billion in 2016.
  • SAP will retain Qualtrics CEO Ryan Smith, as well as the company’s dual headquarters in Provo and Seattle.
  • According to CEO Bill McDermott, SAP views experience management as “the groundbreaking new frontier for the technology industry.”

SAP Gains A Versatile Experience Management Platform

For SAP, Qualtrics solidifies its move into the customer experience management space. Qualtrics follows other recent acquisitions such as Callidus and Hybris, which added capabilities in sales effectiveness and customer experience, respectively.

Although the main focus in this acquisition is customer experience—including brand and product experience—it brings a broader set of capabilities. Qualtrics has expertise in comprehensive market research and data analysis. The same feedback-gathering abilities will also feed into HR with Success Factors and expenses with Concur.

Constellation POV:

SAP considers experience management to be a new market category and is prepared to pay a big premium to establish a position in it. The goal seems to be redefining the category, not just matching or bettering the offerings of other competitors.

Qualtrics Customers Gain Stability, SAP Customers Gain XM Capabilities

Current Qualtrics customers may well worry that acquisition by SAP will diminish the startup’s attitude thus far. Qualtrics has had a very customer-focused culture and an “anything goes, art of possible” approach to the world. By retaining the CEO and Qualtrics’ dual headquarters, the intent is to limit negative impact to customers.

Constellation POV:

SAP sees synergies with their sales and marketing suite C/4 HANA. Constellation sees opportunities in the SuccessFactors unit as well as the Concur unit given the dominance Qualtrics has in the travel sector. SAP customers who aren’t already working with Qualtrics can expect some heavy cross-selling for the next 12 to 18 months.

Upside and Downside Risks Enter The Calculus

SAP customers gain a new tool in the portfolio. Though customers will have to pay for Qualtrics, it won’t be coming free with maintenance.  SAP has made a clear—and big—bet on the importance of experience management going forward.

Constellation POV:

Despite the high valuation, Qualtrics technology is behind others in the space, notably Medallia.There has been good adoption and saturation in the market already in some industries such as travel and hospitality. What remains to be seen is how long it takes SAP to realize the value of this new market segment that’s implied by the purchase price.

The Normal Is Beyond a 9 to 10X Valuation for Hot Feature Companies

Over the past 10 years, VCs and investors have effectively chosen the winners and losers in each of the major software market categories. New startups have been funded based on features, not necessarily new market categories. The result is fewer major acquisition targets and greater competition to buy them. It seems that the days of a 9X or 10X revenue valuation are over. At 20X revenue, the Qualtrics acquisition may be a harbinger of things to come.

Constellation POV:

Competitors such as Survey Monkey will face a tougher road winning the B2B enterprise market.  Meanwhile, privately held startups such as Medallia and Clarabridge may benefit with higher valuations as they IPO.  It’s time for internal software R&D teams to up their game—they might just have become a much more competitive investment option.

Thanks to R. "Ray" Wang for his contributions to this piece.