What's going on?
SAP, Europe’s biggest tech company, was feeling somewhere on a scale from one to five on Monday after announcing plans to hold an initial public offering (IPO) for survey software maker Qualtrics.
What does this mean?
SAP bought US company Qualtrics for $8 billion back in 2018, in an effort to beef up its cloud customer relations business and better compete with customer relationship management giant, Salesforce.com. But investors were worried at the time that SAP had paid over the odds as a way of convincing Qualtrics to abandon the $5 billion IPO it was planning. By selling 10-15% of the company to public investors, SAP will now be able to recoup some of the money it spent – and by keeping hold of the rest, it’ll still be in control of day-to-day operations.
Why should I care?
The bigger picture: The long way round.
A Qualtrics IPO might justify the price SAP paid last year if other investors are willing to buy its shares at that price or higher. The move will help SAP in at least a couple of other ways too: it’ll bolster the German giant’s cloud-based business, and it’ll give investors a clearer idea of what Qualtrics is worth on its own (investors need to work through more complex calculations when Qualtrics is wholly owned by SAP). And if investors then want to buy in, the boost in Qualtrics’ share price will help boost the valuation of majority shareholder SAP too.
For markets: What a pleasant surprise.
SAP also updated investors on its second-quarter earnings on Monday. The company did exactly as well as it suggested it would earlier this month, but it added a higher forecast for the “free cash flow” this year than it’d previously promised. That’s money SAP can use to pay investors dividends and buy back shares, further boosting their returns – which might be why its stock rose 3%.