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After 7 Israeli acquisitions, SAP now has 500 employees here, with plans for more.

In contrast to most other foreign development centers in Israel, SAP is German, not American. The enterprise software giant has made no less than seven acquisitions in Israel, making it one of the biggest buyers of Israeli companies.

While most of the acquisitions were for less than $10 million, SAP obtained both technology and Israeli development personnel.

The two main acquisitions, which have determined the character of SAPs development center in Israel, were both companies founded by the Agassi family. The most important was TopTier Software, which childhood friends Shai Agassi and Udi Ziv founded, and sold to SAP for the healthy sum of $400 million in cash. The other was TopManage Financial Solutions, founded by Reuven Agassi, and acquired for $7.6 million.

SAP (NYSE, LSE: SAP; XETRA: SAPG) currently has 500 employees at its offices at the Raanana Junction, almost all of whom are development personnel. Udi Ziv, who manages SAPs laboratories in Israel, says that this number will probably double to 1,000 development workers within 3-4 years, making SAP Israel the third largest foreign development center in the country, after Intel (Nasdaq: INTC) and Motorola (NYSE: MOT). The way to reach 1,000 people is to identify areas of innovative technology, and increase our activity in them. This is not a matter of a black or white decision; it involves a series of individual decisions about new activities, Ziv explains.

Globes: Will this impressive growth in staff come from more mega-acquisitions like TopTier?

Ziv: Im not saying there wont be more mega-acquisitions, but Im not predicting any. SAPs strategy is not to make acquisitions to obtain market share, but to look for breakthrough technologies. Most of our expected growth in personnel in the coming years will be organic. In 2004 alone, we increased our staff by 40%, without any significant acquisitions.

Do you have business development people here looking for companies to acquire?

There is a group here that reports directly to me. Its job is to constantly look at the market. This group sees hundreds of companies a year, both small and large. The idea is to find the occasional diamond a company with a revolutionary technology. Were very active in looking for new companies. We look for companies where they are to be found, and Israel is the place.

Where do you have a technological hole that you want to fill?

I cant point to a specific field. Holes develop very quickly, because the market moves so fast. Wherever theres a technological gap, either SAP develops a product, or finds a potential player for acquisition. When you identify a technological gap, the spectrum of solutions available in Israel is large in absolute terms, not just compared with the size of Israels population.

How important is geography in considering an acquisition?

It is a factor, and it works in Israels favor. Suppose we discovered a new technology we wanted to buy in a remote place like Iceland. Its not impossible to acquire activity there, but every acquisition is a kernel of activity that must rest on a critical mass. Making an acquisition in a region in which we already operate is therefore much simpler, because the acquired company is connected to an existing network, and the chances of success are better. There is no doubt that geographic location is one of the reasons why SAP has made half of its acquisitions in Israel.

The development centers current activity can be divided into four main sections. The largest area is the enterprise portal and the SAP NetWeaver platform, with 250 employees. The next largest is SAP Business One, which develops software for small and medium-sized enterprises, and employs 150 people. The third largest is supply chain management (SCM), which originated with SAPs first acquisition in Israel, OFEK-tech Software Industries, and has 50 employees. The fourth is integration of SAPs systems with those of Microsoft (Nasdaq: MSFT), mainly Office, a new activity for SAP, with 50 development employees.

Series of acquisitions

SAPs first foothold in Israel preceded the acquisition of TopTier by several years. SAP acquired the start-up OFEK-tech for $10 million from the ORS personnel agency (45%), Shlomo Hasdai and Avi Elyakim (45%), and Avi Landau (10%). SAP got an innovative solution for warehouse management from OFEK-tech, plus 20 employees.

SAPs only mega-acquisition in Israel was TopTier, which gave SAP its enterprise portal a system that coordinates information from an enterprises various computer systems, and displays it in a customized form. In 1998, SAP began thinking about an enterprise portal, but it didnt advance at the right pace, Ziv says. Hasso Plattner (who founded SAP, and was CEO until a few years ago, O.L.) met that year with Shai Agassi. After he saw TopTiers portal, he decided that this would be the portal that would lead SAP, and the two companies signed an OEM agreement).

The OEM agreement wasnt enough for SAP?

SAP realized that a portal is a critical tool. They were afraid that TopTier would sign strategic cooperation agreements with other companies. At the time, TopTier was talking with other companies, including Microsoft, and thats what made SAP reach for its checkbook. TopTiers portal was strong in integration, and was able to view SAPs world very well.

For that kind of money, wouldnt it have been more worthwhile for SAP to develop its own portal?

Thats a valid question for any product. TopTier had a lot of experience and technology, and a very deep understanding of the portals market. SAP knew that they could develop their own portal in a few years, perhaps by trespassing onto TopTiers patents, but a few years in the market is the difference between success and failure.

How much do sales of the portal amount to?

We dont measure the revenue of the portal, because the revenue is counted as part of our overall revenue.

Ziv adds that the acquisition of TopTier not only introduced the portal to SAP, it also made a much more significant contribution NetWeaver. This is an open platform on which SAPs applications are based, which makes it possible to integrate them with other applications from other sources. The concept of a platform with integration infrastructure for processes comes from TopTier. You could say that much of SAPs current strategy originates with TopTier, and when you see that, you realize that $400 million is a very small amount.

The next acquisition, in 2002, was TopManage. Founded in 1996, the company developed Menahel (the Hebrew word for manager), a system for managing the routine activity of small and medium-sized businesses. The shareholders in TopManage were Quicksoft Development, a company owned by the Agassi family (50%); the Harel Computers group (25%); TopManage employees (15%); and private investors. The Menahel platform, which is now a part SAPs department for small and medium-sized businesses (SMB), had sales of $50 million in 2004.

Entering the SMB market

Entering the SMB market was a change of direction for SAP, which focused on sales of enterprise resource planning (ERP), customer relations management (CRM), and SCM software to giant companies with thousands of employees. What lay behind this decision was the realization that the small business market was growing, and would constitute a major growth engine in the future. Just like large enterprises, small enterprises need information systems to given them real-time data about the state of the business. Entering the SMB market is the second revolution that Israeli development has engineered in SAP. There are now 78 million small businesses in the world, making up 99% of all the worlds companies. IT spending by small and medium-sized companies accounts for only 30% of total corporate IP spending, but that still amounts to many billions of dollars, Ziv points out.

There is still no dominant player in the SMB enterprise software market, and in all probability, no company will achieve a major share in the next few years. Every country has a local player, which usually has a sizeable market share, and usually offers lower prices for the software packages sold by multinational software companies. Microsoft, incidentally, recently entered the SMB market by acquiring Great Plains for $2.4 billion and Danish company NewGen, and Oracle (Nasdaq: ORCL) and Sage are also active there.

The market share acquired by Microsoft is small, and the players are competing fiercely to plant their flags on the ridge. Our product for this market is already recognized in 70 countries. In numbers, were the biggest in this market. Whats really important in SMB is the emerging markets, where the growth rate is substantial, and penetration of those markets constitutes a great advantage, Ziv said.

SAPs next two Israeli acquisitions, made in 2003, were Expression and GUI Machine, each for about $1 million. GUI Machine designed the Visual Composer, a tool that makes it possible to create content on a portal without writing code lines manually. All the programmer has to do is write a flow chart for the business process, and the tool automatically creates the code lines, thereby saving on expensive programming time.

Expression developed a tool for sharing information in real time, called Real Time Collaboration, which facilitates file sharing between users, even if they are physically distant from one another.

We were a family; now were a clan

The second largest check signed by SAP for an acquisition in Israel was for $20 million cash last July, for the acquisition of Israeli-US master data management start-up A2i. A2i developed a systematic solution for the problem of duplicate displaying of items in information systems. A2is solution, which has already been installed in SAPs systems, makes it possible to consolidate duplicate listing of products that have been recorded in different ways in information systems, and display them to the user with no duplication.

SAP made its seventh acquisition in Israel in late 2004, when it paid $500,000 for Virtual Locality. The start-up developed a wide area network (WAN) acceleration algorithm for enterprises, which makes it possible to transmit information quickly between two remote sites.

Of the activity that you have acquired, which has been discontinued?

A while ago, we transferred CRM activity, in which 10-15 employees worked, to India, because we decided that this activity had reached maturity. We transferred the employees to other tasks in the development center. SAP has an advantage in product development everywhere in the world; in Israel, the advantage is innovation. Theres no reason why things not related to innovation should be done in Israel.

Have some people left the center to found independent companies?

We havent lost any key people yet, but I assume it will happen in the future. Once we were a family; now, were a clan, but I think we still havent lost the family feeling of a start-up.

What are your personal plans for advancement at SAP?

My dream is to make Israel the leading and most influential development center.

There has been a lot of criticism saying that Ness Technologies, which represents SAPs products in Israel, is abusing its advantage as an implementer in tenders.

Ive heard that criticism, too. Everyone in the market has their own interest. Ness Technologies has an advantage in know-how, and in its deeper understanding of SAP, and thats a legitimate advantage. Incidentally, SAP has 100,000 consultants worldwide, over 90% of whom are not SAP employees. 25% work at IBM and Accenture. This working concept also applies to Ness Technologies, which sells both licenses and consultation.

A big wave of consolidation is sweeping the software market

How much competition is there between SAPs laboratories?

SAP has four main laboratories around the world. These laboratories never do anything that is not coordinated with the companys strategy. We work in cooperation with the other laboratories, and we dont steal projects. Our main laboratory is in Germany, where we build infrastructure for SAPs products, and where all the IP is located. The Israeli laboratory is considered the innovation laboratory, the Palo Alto laboratory works vis-a-vis the main players, and the Indian laboratory has cheap labor.

To what degree does Israels distance from the global market affect development?

Germans and Americans usually define the market and the product. Israel also has many people who travel around the world to meet with customers. I think that interaction between development and the market is important, and Israel has some fantastic customers that are willing to go with the market.

How much does the expansion of your activity in Israel in the next few years depend on government grants?

The state has got to help us be attractive. A big wave of consolidation is sweeping the software market, and international companies are deciding where their future will be. At SAP, innovation is always balanced against the cost. The question of where to develop is always under consideration. If the state can change the equation to make the cost of an engineer in Israel double the cost of an engineer in India, compared with the current situation, in which an Israeli engineer costs three times as much as an Indian engineer, it will have a big effect on decisions. The decision eventually goes to the CFO, who uses his spread sheet to make it.

But how much can a $5 million grant affect a development center of your size?

It has a big effect, because every project is considered by itself. I dont think that government aid has to come solely from the budget of the Office of the Chief Scientist; it can also come through other channels. Were trying to find a formula that wont necessarily take money from the government, but will cut our costs.

In any case, theres justice in the claim that the Israeli taxpayer shouldnt have to contribute to the earnings per share of foreign companies.

SAP has invested $500 million in Israel to date, and hasnt sold products here for even a fraction of that sum. Our investment gives Israel employment and tax revenue. Government aid is a process that will help us create direct and indirect jobs.

Keep in mind that when the bubble burst, small start-ups were the hardest hit. The large companies were the ones that maintained the stability that is so critical to the Israeli economy. Despite the good things I have to say about start-ups, the country should help create large companies as anchors, so that when the next storm blows, we wont be driven like a leaf in the wind, and the fall wont be so painful.

Published by Globes [online], Israel business news - www.globes.co.il - on March 3, 2005

 
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