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SAP CEO Bill McDermott resigned six months after activist investor Elliott elbowed in (SAP)

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  • SAP CEO Bill McDermott shocked the software world on Thursday by announcing his resignation, effective immediately.
  • The resignation comes six months after activist investor Elliott Management announced that it had taken a stake in SAP, and after the company agreed to some of its demands to improve profitability. 
  • McDermott says he 'enjoyed' working with Elliott but he made the decision not to renew his contract, up in 2020, all the same.
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SAP CEO Bill McDermott shocked the software world by announcing on Thursday his resignition, effective immediately, when SAP pre-announced its third-quarter earnings this week.

"I've been with SAP 17 years and I've been CEO for 10 and that's a long time," McDermott told CNBC on Friday. "At the beginning of 2020 I would have had to announce a decision to renew my contract or not renew. I made the determination I wasn't going to renew, so right now was the perfect time to make this transition."

He also told CNBC that he had not been at war with Elliott Management, the activist shareholder company that had taken a position in the company earlier this year, and that had pressured SAP into making changes in the name of profitability.

"Elliott management has been an excellent investor and an excellent advisor. We have many excellent investors and advisors. Elliott has been a total positive and I've enjoyed my interactions very much. That may be contrary to what some people have experienced, but that's my experience," he said.

SAP has returned to the co-CEO structure it employed when he first took over in 2004. Its new CEOs are SAP Executive Board Members Jennifer Morgan and Christian Klein.

Morgan, 48, was running the Cloud Business Group, overseeing Qualtrics, SAP SuccessFactors, SAP Ariba, SAP Fieldglass, SAP Customer Experience and SAP Concur.  Klein, 39, was chief operating officer, overseeing product development for the flagship ERP solution SAP S/4HANA.

McDermott, the charismatic self-made sales guy-turned-chief exec, had pushed the German company — the world's largest enterprise software maker – kicking and screaming into the new world of cloud computing. But he did so at a literal cost. McDermott bought his way into cloud revenue with one multi-billion acquisition after another.

Under his leadership, SAP bought expense management software provider Concur for $8.3 billion, HR software company SuccessFactors for $3.4 billion and Callidus, a developer of sales performance management tools, for $2.4 billion.

One of his biggest deals came a year ago, when he acquired market research and survey software company Qualtrics last year for $8 billion a year ago, right before its IPO. Qualtrics and SAP are trying to build a new category of software called experience management — McDermott was so excited about the acquisition, he started to sign his emails "XO," representing Qualtrics eXperience management + SAP's operational financial software.

Read: Oracle is hiring 2,000 people for its cloud business after laying off untold thousands earlier this year, and an insider explains why it's a smart strategy

And SAP's revenue did and stock price did grow under McDermott, who was able to sell the story of how SAP was pushing itself into new frontiers.  But he was also regularly criticised for spending too much for too little value, eating up profits along the way.

Acquisitions raised eyebrows

McDermott was SAP's first American CEO. He joined SAP in 2002 as head of North American sales. In 2010, he had vaulted into the co-CEO role with then-head of product development, Jim Hagemann Snabe. Four years later, he took over as sole CEO.

The choice to go with the American to lead the German company was controversial internally, sources at the time told Business Insider. SAP is lead by an executive board, but the true political power of the company still resides with its founder and chairman, Hasso Plattner. Plattner supported McDermott and his bold plans to grow SAP's cloud business through big, headline-grabbing acquisitions, sources told us over the years.

But the German company is, at its roots, a conservative accounting and financial software company and McDermott faced regular criticism over the prices SAP paid for these multi-billion acquisitions, particularly Qualtrics.

Investors began to grumble for bigger profits, as they are wont to do. Last April, activist investor Elliott Management announced a stake in SAP, after months of negotiations with the company.  Elliott is famous for buying a stake and pressuring companies to do better for shareholders, sometimes even resulting in the resignations of the CEOs. 

SAP agreed to the formation of a Special Executive Board Committee and to a set of new, multi-year operational targets. Elliott put out a press release of support for SAP generally and McDermott specifically.

Back in April, SAP also agreed to a special investors meeting in November to detail its plans to investors.

McDermott's resignation comes from a position of strength

However, McDermott's immediate resignation comes on the heels of a better than expected quarter, beating expectations on both revenue and EPS. It's operating margin, at nearly 25% was up by almost 2 points for the quarter. But the year-to-date operating margin was at 12%, a decline over previous years, according to MacroTrends.

On Thursday, the company also reiterated its full year expectations and announced "Ambition 2023," its financial goals for the next few years. These include tripling cloud revenue and increasing overall revenue while also achieving a cloud gross margin of 75% and growing operating margin by 1% per year.

So SAP wants to grow vastly grow its cloud revenue while increasing profits, and the flamboyant deal-maker McDermott has bowed out to let them do it.