Is SAP paying $5.8B for Sybase’s $400M mobile business?

“Is SAP paying $5.8B for Sybase’s $400M mobile business?”, that’s the question being posed by several industry analyst.

First, let’s go behind the numbers – $5.8 B and $4oo M.  Where do they come from and what to they represent?

$5.8 B

On May 12th, 2010, SAP announced the acquistion intention with a press release in which it states “SAP America, Inc. will make an all cash tender offer for all of the outstanding shares of Sybase common stock at $65.00 per share, representing an enterprise value of approximately $5.8 billion”

Ok – enterprise value.  What is enterprise value?

According to Investopedia, “Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.”

In other words, SAP paid $5.8 B to pay for market value of  common  and preferred stock, outstanding debt after subtracting for any cash and cash equivalents (short-term marketable securities, etc.).

$400M

According to the Cowen analyst Peter Goldmacher, Sybase’s two mobile businesses account for 30% of Sybase’s revenues, or nearly $400M.

Above is the snapshot from Sybase 2010 10 K statement.
If we add up all the revenue for iAS (iAnywhere Solutions) and SY365 (Sybase 365) – the two mobile segments – the total comes to $369.7.  So, yes, close  to $400 M.
Now that we understand where this numbers comes from let’s try to answer the core question “”Is SAP paying $5.8B for Sybase’s $400M mobile business?”
According to the acquisition related SAP press release, “The per share purchase price represents a 44% premium over the three-month average stock price of Sybase.”   SAP put a price of $5.8 B on Enterprise Value (EV) for Sybase, where EV = market cap + debt – cash.  Since the debt and cash position for Sybase didn’t change materially, basically, SAP paid 44% premium over the market cap.
On May 12th, right before acquisition annoucment:
3 Month Average Stock Price:  $45.77
Outstanding Common Stock (from 10-K):  80,118,000 shares
Market Cap:  $3.67 B (rounded)
With 44% premium over the stock price:
Stock Price after premium: $65.91
Market Cap after premium: $5.28 B (rounded)
Now your is my key point. Prior to SAP announcement, market participants valued the company at $3.67 B based on company’s future earning potential. How much of that might be attributed to the growth in mobile business?  Hard to say, but generally, analyst’s have several models as Discounted Cash Flow, Residual Earnings, Abnormal Earning Growth, etc that can be used to “price in” the revenues from different product categories.
Let’s take a simplistic aproach and let’s say we can attribute 30% of the stock price (and hence, the market cap) to it’s mobile business taking into account that 30% of it’s revenues come from mobile.
On May 12th, right before acquisition annoucment:
Market Cap attributable to mobile business: $3.67 * 0.30 = $1.1 B

With 44% premium over the stock price:
Market Cap attributable to mobile business: $5.28 * 0.30 = $1.59 B
Or, in other words, SAP (just) paid an extra premium of $490 M for SAP’s mobile business.
In conclusion, clearly, SAP is not paying $5.8 B for $400 M mobile business.  Based on my argument above, SAP just paid close to $0.5 B in premium for the mobile business.   The synergistic value added by  Sybase’s mobile assets (products + customer relations) for SAP to extend it’s core to future “on device” age, in my opinion,  exceeds $0.5 B by a far margin.

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One response to “Is SAP paying $5.8B for Sybase’s $400M mobile business?

  1. You’ve done it again. Superb post!

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