UPDATE: SAP's Sybase Deal Aids Competition; Doubts On Price

Business-software company SAP AG (SAP) Wednesday agreed to buy Sybase Inc. (SY) of the U.S. in a $5.8 billion all-cash deal that will enable it to better compete with rivals but left analysts wondering whether it paid too much.

The deal "isn't exactly a bargain," said Cheuvreux analysts. Investors seemed to agree. At 1528 GMT, SAP shares traded down 1.2% at EUR35.62, while the benchmark DAX index traded up 1.2%. Frankfurt's stock exchange was open despite a public holiday in Germany.

SAP's offer for Dublin, California-based Sybase comes as SAP struggles to outpace rival Oracle Corp. (ORCL) and after the recession sharply clipped earnings, with many businesses opting to put off investments. SAP makes software that businesses use for tasks such as accounts and managing inventory.

In spite of the price tag, analysts at Cheuvreux noted the acquisition offers SAP a wider customer base, especially in Asia where mobile devices play a larger role in business, and it could become a growth engine for the company.

Sybase is particularly attractive for SAP not only because of its database software, which will make it less reliant on reselling Oracle products, but also because of its leading position in new growth technologies such as mobile applications.

Sybase is an industry leader in delivering enterprise and mobile software to manage, analyze and mobilize information.

Sybase's database software competes with offerings from Oracle and International Business Machines Corp. (IBM), although it trails those two companies in market share. According to Gartner, Sybase had a 3.1% market share of database management software revenue last year, far behind Oracle with a 42.5%, International Business Machines Corp. (IBM) with a 23.6% and Microsoft Corp. (MSFT) with 18.6%.

"The reasons for the deal are sound--the ability to build mobile applications and credibility and support for SAP's in-memory database," said Gartner Vice President Yvonne Genovese. She declined to comment on the financial aspects of the deal.

"Access to Sybase's mobile application technology will generate more revenue in the short term, but Sybase's skills in managing database technology will support SAP's strategic vision of providing in-memory database technology to its clients," Genovese added.

The two companies already work together after SAP last year agreed to use Sybase to build all of its mobile applications. In March SAP released an application that lets mobile workers on the move, using devices such as Apple Inc.'s (AAPL) iPhone and Research in Motion Ltd.'s (RIMM) BlackBerry, respond to alerts and complete tasks like time recording and travel requests through an email inbox.

People familiar with the situation said SAP agreed to a EUR2.75 billion loan to back the purchase and is financing the deal with a mixture of cash and debt. Deutsche Bank and Barclays Capital are arranging the debt financing. It is unclear whether the loan will be syndicated to a wider group of banks.

SAP Co-Chief Executive Bill McDermott Thursday confirmed that talks on the acquisition began as recently as March.

"With this acquisition we open our business applications to several hundred million mobile users," McDermott said Wednesday.

The acquisition is SAP's biggest since its purchase of Business Objects in early 2008 for about EUR4.8 billion.

-By Philipp Grontzki and Archibald Preuschat in Frankfurt and Carol Dean in London, Dow Jones Newswires; +49 211 138 7218; archibald.preuschat@dowjones.com

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