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The largest European software supplier, SAP, is under pressure. In less than twelve months, activist investment firm Elliott Management acquired stakes of 1.2 billion euros, several top executives left the company and a restructuring plan is in place to save almost one billion euros. The latest development is the departure of CEO Bill McDermott, after CTO Björn Goerke left earlier this year. What is going on with the German ERP giant, who had little to fear for a long time?

Elliott Management is generally known as an investor who, after acquiring shares, causes unrest and stress within tech companies. The investment company often comes up with tough demands after acquiring an interest. In the past, for example, it wanted to see changes at the top level of multiple IT suppliers.

Officially, Elliott Management has been with SAP since April, by buying up about one percent of the SAP shares. However, the discussions between the two parties had been going on for some time. In the corridors, you sometimes hear that Elliott Management has an influence on recent developments, but we have not yet heard SAP itself confirm this. Now that McDermott is quitting – after ten years he thinks it is the right time to quit – there is speculation about the influence of the shareholder once again. After all, McDermott’s departure was a surprise for many.

The software giant itself rarely speaks about the role of Elliott Management in the loss of the top managers. As a result of his departure, McDermott came into contact with CNBC with a statement about the activist investor. “Elliott Management is an excellent investor and advisor. We have many excellent investors and advisors, and Elliott is completely positive. I really enjoyed all our work together. That may conflict with some people’s experiences, but it’s my experience,” says the former SAP CEO. Also, during our visit to the annual Sapphire conference, when Elliott Management had just joined SAP, McDermott talked about a great investor.

Why is Elliott Management known as a difficult investor?

The fact that McDermott starts with his statement on contradiction says something about the image of Elliott Management. The shareholder is popular with investors because of the fact that it often drives up the share price, but IT suppliers often do not see Elliott Management as the ideal investor. This is because of the turmoil the firm causes, sometimes even through litigation. The investment company does not actually engage an IT company until it thinks that the IT company is underperforming, or when shares are not worth what they could be.

In concrete terms, Elliott Management is investing in SAP because it believes that share value is undervalued in relation to the growth in turnover. The investment of 1.2 billion should form the basis for “substantial value creation”, Elliott Management stated earlier. SAP expects to achieve a profitability of 5 percent by 2023, something that Elliott Management is committed to. The shareholder has hopes for a profit per share (EPS) of EUR 8.50 in 2023. Recent figures, for example from June earlier this year, show an EPS of almost 3 dollars. The target of 8.50 euros will probably be supported by buying back shares, McDermott had already said that SAP wanted to do this.

In addition to these goals, Elliott Management has issued a statement on further steps for SAP. This refers to a ‘comprehensive review’ of the German software giant, as well as the setting up of a Special Executive Board Committee. This is in order to monitor the formulated objectives, so that profitability will actually increase.

Restructuring plan led to a turbulent period

The signs of major changes in SAP had already emerged before Elliott Management had officially invested. At the beginning of this year, the software supplier announced a restructuring plan in order to review its workforce. As a result of this restructuring, some 4,400 employees are leaving. Of course, different employees will change jobs and some of them will be offered early retirement. At the same time, the workforce is expected to grow this year, from 96,500 to 100,000 employees. This means that new staff will also be added.

The plan followed shortly after the financial results of 2018, when there were signs of some delay in the cloud business. With the restructuring, SAP hopes to save hundreds of millions (almost one billion) euros, especially in the long term, although this year some of those saved costs will already have to be noticeable.

Changes are also visible at the executive level

Few people had foreseen that, less than twelve months later, almost the entire C-level would be filled in differently. One of their biggest losses is CTO Björn Goerke, who had been with the company for more than 20 years. Certainly, in view of SAP’s shift in the area of software, it is a pity to see that the person who drew up their technological strategy has gone. The German company is shifting more and more from traditional enterprise software (such as ERP) towards Software-as-a-Service from the cloud.

Another important technological executive, Robert Enslin, left a little later. He led the cloud business, including key SAP subsidiaries such as SuccesFactors and the $8 billion acquisition of Qualtrics. Enslin was also a member of the board of directors and had a strong influence on the company’s cloud strategy. Because of his expertise, Enslin helped McDermott with the development of the cloud portfolio and was even tipped off as future CEO of SAP.

Like that, even more key people left Europe’s largest software company, including board member Bernd Leukert, for example.

2019 was not the year that SAP had hoped for, in any respect

2019 will undoubtedly be recorded in SAP’s books like it had hoped. Of course, a number of things have to be done on a technological level, if the company is to remain relevant in a rapidly evolving software market. In any case, it is working hard on this, we noted during Sapphire.

The fact remains that there have been many changes of top positions, perhaps even too many within such a short period of time. The replacements for the top executives who have left are of course ready. McDermott’s position is filled by two people, Christian Klein and Jennifer Morgan, by means of a co-CEO model. And Goerke has now been replaced by Jürgen Müller, trained at the Hasso Plattner Institute (of SAP co-founder Hasso Plattner); he has been working for SAP for some time already. The company fills vacant top positions with younger managers. This will certainly bring a breath of fresh air to the company, no doubt accompanied by the expertise of the revered Hasso Plattner.

What the real role of Elliott Management has been in the recent turmoil will remain a mystery for now. The investment company is known to be difficult, but on the other hand SAP rarely expressed negative criticism of Elliott Management. Let’s hope that the changes work out well for Europe’s largest IT supplier.