Category: Enterprice Resource Planning

‘Little brothers’ eyes get big

Brenon Daly

Contact: Brenon Daly

As virtually all investors are acutely aware, public companies get their valuations reset every trading day. And with the Nasdaq having been cut in half since the highs on the index in November 2007, those valuations are universally being reset lower. That has created a somewhat counterintuitive situation where public companies sometimes trade at a substantial discount to their privately held counterparts, despite typically being larger and certainly more liquid and transparent investments.

That pricing discrepancy has spurred some of the ‘little brothers’ to make runs at their publicly traded brethren. Last year, we saw HireRight taken private after a year on the Nasdaq by privately held US Investigations Services for $195m, or about twice the sales of the human capital management (HCM) vendor. On a larger scale, Sophos reached for German endpoint encryption vendor Utimaco in a private-public transaction last summer.

What other private company might be viewing the Nasdaq as a shopping list? We’ve heard that software-as-a-service (SaaS) roll-up nGenera recently ‘broadened its horizons’ to also include public companies. The vendor, which we understand did roughly $50m in sales in 2008, has raised some $50m from investors including Hummer Winblad Venture Partners, Foundation Capital and Oak Investment Partners. It has already inked six acquisitions.

Our understanding is that nGenera is looking to add HCM or even sales compensation management technology, which it sells as part of a larger on-demand offering. In addition to being attracted to the discount valuations of public companies, nGenera is also eyeing Nasdaq-listed targets because they are typically more mature than startups and would have more customers to add to nGenera’s existing roster of some 300 enterprise clients.

nGenera’s acquisition history

Announced Target Deal value Target description
May 21, 2008 Talisma Not disclosed SaaS customer service automation
March 5, 2008 Iconixx Not disclosed On-demand talent management HR software
November 29, 2007 New Paradigm Group Not disclosed Research company
October 3, 2007 Industrial Science Not disclosed Business simulation software
September 13, 2007 Kalivo Not disclosed On-demand collaboration provider
May 7, 2007 The Concours Group Not disclosed Research and executive education firm

Source: The 451 M&A KnowledgeBase

A SaaS-y deal

Brenon Daly

Contact: Brenon Daly

Given the rich premium that Wall Street awards to on-demand software companies, it’s no wonder that vendors still hawking software licenses are looking to get into the business of selling software as a service (Saas). Of course, there are many obstacles in making that transition, ranging from internal (how to compensate sales staff) to external (how to communicate to investors). As a result, most old-line software companies offer only a tiny bit of their products on-demand, if they do at all.

The few vendors that have seriously tried to transition to the on-demand model have used both organic and inorganic approaches. Concur Technologies largely stayed in-house to create a ‘for rent’ version of its expense account software. (Wall Street has rewarded the company with an eye-popping valuation of 5.5x trailing 12-month revenue.) Meanwhile, Ariba more than doubled the on-demand portion of its business when it spent $101m for SaaS supply chain vendor Procuri in September 2007.

We mention all this as a (long-winded) way of saying that we don’t understand why Callidus Software didn’t take home on-demand vendor Centive, which had been on the block for some months. Callidus has been selling its sales compensation management products as a service for about three years, with on-demand shoppers accounting for one-third of its 180 total customers. A year ago, it acquired a small SaaS vendor, Compensation Technologies, for $8.3m to bolster its transition efforts. One source indicated that publicly traded Callidus was initially interested in smaller rival Centive, but didn’t follow through. Instead, last week Centive and its estimated $10m in revenue went to fellow startup Xactly Corp in an all-equity consolidation play. Callidus making a run at Xactly probably won’t happen, for reasons both personal and financial.

For starters, Xactly is too expensive for Callidus, a money-losing company that holds some $39m in cash. An equity deal is probably off the table, given Callidus’ paltry valuation. Its enterprise value is just $46m, less than half the $105m in sales it likely recorded in 2008. (Callidus reports fourth-quarter earnings on Tuesday.) Beyond the money, there’s also the complicating factor that most of Xactly’s executives used to work at Callidus before setting off on their own with an eye to knocking out their former employer with their on-demand model. If indeed the two sides do ever start talking, we might suggest that a family therapist be on hand, in addition to the bankers and lawyers.

Salesforce.com’s service play

Brenon Daly

Contact: Brenon Daly

Heading into Thursday‘s luncheon hosted by Salesforce.com, there was a fair amount of speculation that the software-as-a-service (SaaS) stalwart would be using the event to announce a new acquisition. The company employed the same setup to disclose its purchase of tiny content management startup Koral in April 2007. The rumors turned out to be off the mark a bit, as the luncheon instead focused on Salesforce.com’s rollout of a new customer service offering. There is a link to M&A, however. The offering unveiled, Service Cloud, got a substantial boost when the company picked up privately held InStranet last August.

InStranet stands as Salesforce.com’s largest acquisition in its 10-year history, but one insider told us the deal almost didn’t happen. Salesforce.com paid $31.5m for InStranet, which we understand was about twice the amount of sales the French company booked in the year leading up to the transaction. But Salesforce.com wasn’t the first bidder for InStranet, according to one source. SAP had moved pretty far along during M&A discussions with InStranet before Salesforce.com entered the picture. Marc Benioff’s buyers buttoned up the purchase in just three months, the source added.

And then there were five: Salesforce.com’s acquisition history

Announced Target Deal value Target description
August 2008 InStranet $31.5m Customer service automation
October 2007 CrispyNews Not disclosed Community news, website development
April 2007 Koral $7m* Web content management
August 2006 Kieden Not disclosed Search engine marketing management
April 2006 Sendia $15m Wireless application developer

Source: The 451 M&A KnowledgeBase *451 Group estimate

Hedge fund goes tender on Epicor

Brenon Daly

The largest shareholder of Epicor on Wednesday took its unsolicited bid directly to shareholders, just one day after the ERP vendor nixed the offer. Two weeks ago, hedge fund Elliott Associates offered $9.50 for each share of Epicor, giving the proposed transaction a $566m equity value and $814m enterprise value. (Elliott says the all-cash bid is not conditional on financing.) Epicor officially shot down the proposal, asked shareholders to wait for its board to review the proposal. The tender offer is set to expire in a month, but can be extended. Elliott, which began buying the stock in June, owns 10% of the equity, plus a slug of convertible notes. Epicor shares closed Wednesday up 4 cents at $6.84.

Unclipping Click Commerce

Brenon Daly

It turns out that software doesn’t really fit in a toolbox, after all. Illinois Tool Works, which reports third-quarter earnings Thursday, said recently that it plans to divest its Click Commerce division. (With the process just beginning, we don’t expect ITW to say much about the divestiture during tomorrow’s call.) The move would unwind ITW’s puzzling purchase two years ago of the supply chain management vendor. It paid $292m in cash for Click Commerce in September 2006.

ITW is a 96-year-old company that makes everything from commercial ovens to industrial packing tape to arc welders. It has inked more than 50 acquisitions during each of the past two years, spending about $1bn in 2007 and $1.7bn in 2006. And the company is on pace for a similar number of deals this year, having notched 26 buys in the first two quarters. Acquisitions are key for ITW, since the additional revenue picked up represents virtually the only growth at the company. In 2007, its core business expanded just 1.8%.

In announcing the divestiture, ITW indicated that Click Commerce had sales of $67m last year. (That was down slightly from the $74m the company posted in the four quarters prior to the acquisition.) And although ITW hasn’t broken out updated cash-flow figures for Click Commerce, the company has, historically, been a profitable operation. (In the two quarters leading up to the acquisition, Click Commerce had run at a solid 24% operating margin.) We suspect that any number of buyout firms – perhaps those that missed the sale of i2, another big supply chain management company – would be interested in taking a look at the book on Click Commerce.

Epicor: Thanks, but no thanks

Brenon Daly

Epicor has shot down an unsolicited offer from a hedge fund, confirming a move that the market had been expecting in the wake of the credit market collapse. The ERP vendor, which is being advised by UBS, told Elliott Associates that it wasn’t interested in the two-week-old bid of $9.50 for each share of Epicor. Although shares initially approached the $9 level on the news, the stock bottomed out at $6 last week. The gigantic spread reflects widespread doubt that Elliott and Epicor would strike a deal. With about 59 million shares outstanding, Elliott’s offer values Epicor’s equity at about $566m. In addition, Epicor holds $132m in cash and $380m in debt, giving the proposed deal an enterprise value of $814m. Elliott owns 12% of Epicor. We noted even before the credit bubble burst that Elliott might have a tough sell with Epicor.

HCM&A

-by Thomas Rasmussen, Brenon Daly

Rather than hitting the public markets, Authoria has landed in a private equity (PE) portfolio, where it is slated to serve as the initial plank in a rollup in the fragmented human capital management (HCM) market. PE shop Bedford Funding picked up Authoria last week, after checking out the market for about a year and a half. (The guys behind Bedford know a thing or two about market consolidation. Before hanging out a shingle with their $400m buyout fund, the Bedford directors and principals served as executives at ERP rollup Geac, which gobbled up dozens of companies before getting swallowed in a $1bn LBO.)

Its experience with ERP consolidation will likely come in handy for Bedford because we have noted a number of times that the current HCM market – with more than 50 startups, along with three or four large vendors – bears more than a few similarities to the ERP market earlier this decade. The ranks of ERP companies were thinned quite a bit as both strategic and financial acquirers went on shopping sprees. (Oracle, Microsoft and Lawson have all inked significant ERP acquisitions this decade, while PE-backed Infor and Consona got their ERP rollups started in 2002 and 2003, respectively.)

We suspect a similar wave of consolidation may be heading to the HCM market, which covers all the stages of hiring, from pre-employment screening to succession planning. And it’s not a bad time to be a buyer, since HCM valuations are coming down. (Authoria sold for about 1.3x its trailing sales, just half the level Vurv Technology got in its $128.8m sale to Taleo earlier this year. Granted, that’s only one data point, but we’ve heard from sources that the markdown of multiples is being seen across the sector.) Given that, along with Bedford’s stash of cash, we expect the rollup to get rolling very soon. What might it be looking for? Maybe a small vendor that could bolster Authoria’s offering around the early part of the hiring process, such as talent acquisition or screening.

Significant HCM deals since 2007

Date Acquirer Target Deal value Target revenue
September 29, 2008 Bedford Funding Authoria $63.1m $50m*
September 16, 2008 Standard Life Vebnet $43.4m $11.4m
June 9, 2008 US Investigations Services HireRight $195m $72m
May 6, 2008 Taleo Vurv Technology $128.8m $45m*
December 21, 2007 Kohlberg Kravis Roberts & Company Northgate Information Systems $1.2bn $897m
February 4, 2007 Infor Global Solutions Workbrain $197m $96.5m
March 23, 2007 Hellman & Friedman Kronos $1.8bn $599m

Source: The 451 M&A KnowledgeBase *Official 451 Group estimate