FRANKFURT (Reuters) – U.S. activist investor Elliott revealed a 1.2 billion euro ($1.3 billion) stake in SAP and said it supported a new management efficiency drive, sending shares in the German business software maker to an all-time high.

The pivot by CEO Bill McDermott came as SAP reported a quarterly operating loss due to a staff restructuring charge, and started to integrate its latest ambitious acquisition, that of customer-experience software maker Qualtrics.

SAP, Europe’s most valuable technology company, now wants to expand adjusted operating margins by a total of 5 percentage points through 2023 as it scales up its cloud operations, where it aims to achieve a gross margin of 75 percent.

The Elliott stake, equivalent to around 1 percent in SAP, is the first German technology investment by the $34 billion U.S. hedge fund group, which has also urged industrial conglomerate Thyssenkrupp to restructure.

Elliott’s Jesse Cohn and Jason Genrich have a track record of close, long-term engagement with the firms they back, with Cohn for example taking a board seat at online marketplace eBay as part of a deal with management on a strategy review.

“Elliott fully supports the initiatives announced today,” Cohn and Genrich said in a statement on Wednesday.

“The company’s shares were clearly undervalued in relation to its revenue growth, and today’s announcement lays the foundation for substantial realisation of value.”

Responding, SAP said: “SAP is in the fortunate position that a number of shareholders give us regular feedback – we welcome that feedback, which we take seriously, especially as we advance our plans to meet or beat our 2023 ambitions.”

“MAGIC MOMENT”

McDermott, speaking to Reuters earlier, said he was setting up a top team to drive margin expansion as the Walldorf-based company focuses on organic growth while refraining from further major takeovers.

“This is that magic moment that people have been waiting for where they are like, wow, nobody grows like SAP, but can I get some margin out of this growth?” the 57-year-old New Yorker said in an interview.

“We are going to give you a (percentage) point per year between now and 2023. And I think our shareholders are going to be super-psyched.”

Boosting margins in the cloud – where SAP’s subscription-based products are hosted remotely – is the holy grail for a company that still makes most of its money from licence fees and maintenance for software running on customers’ on-site servers.

SAP will update investors at a capital markets day on Nov. 12 in New York. It plans to announce a multi-year share buyback program as McDermott sets his sights on more than doubling the company’s market value to $300 billion.

SAP’s shares have underperformed rivals Oracle, Salesforce and Microsoft in the past 12 months. Some brokers downgraded SAP ahead of the results, questioning the pace of its cloud upgrades and its ability to generate cash.

On Wednesday, though, SAP shares jumped 6 percent to an all-time high, helping lift the Stoxx Europe 600 Technology Index by 2 percent to its highest level since last July.

ONE-TIME CHARGE

The quarterly operating loss of 136 million euros resulted from an 886 million euro up-front charge in relation to the announcement in January that SAP would let go of 4,400 people. Chief Financial Officer Luka Mucic said the process was on track.

After adjusting for that and other one-offs, non-IFRS operating profits rose by 13 percent at constant currencies to 1.47 billion euros, above expectations in a poll of 17 analysts.

Underlying margins also strengthened in the first quarter, as cloud led the way with a 300 basis point gross margin expansion from a year earlier to 66.2 percent, the company said.

That came as investments in infrastructure upgrades rolled off, while further improvements should come as SAP completes the migration of its cloud applications to its HANA database engine, and works more with ‘hyperscale’ cloud computing partners.

One of those partners, Alphabet’s Google, has just hired SAP’s top salesman Rob Enslin, the latest executive to leave in the wake of the restructuring announcement and the $8 billion acquisition of Qualtrics, a deal some viewed as pricey.

McDermott said he still counted Enslin as a good personal friend and the move would help to cement the relationship between the two firms as Google develops its cloud platform franchise.

“Google is a very good partner of SAP,” McDermott said.

($1 = 0.8924 euros)