Hellman & Friedman’s Ultimate HR deal

by Scott Denne

Hellman & Friedman’s $11bn acquisition of Ultimate Software provides the ultimate case study in rising valuations for human resources (HR) software vendors. The deal marks the largest HR software purchase and fixes an 11x trailing revenue multiple on the target, a multiple that’s increasingly becoming common for such companies as private equity (PE) money floods that corner of the software market.

According to 451 Research’s M&A KnowledgeBase, each of the three previous years have witnessed more than double the typical number of HR software transactions sporting a multiple at or above 5x TTM revenue. Strategic acquirers have been more willing to pay up – Ultimate itself paid 8.8x last summer in its $300m pickup of PeopleDoc, its sixth and largest acquisition.

But most of the recent, strong valuations have come from PE shops. Today’s deal provides one data point, as do Thoma Bravo’s purchase of PEC Safety and Marlin Equity Partners’ reach for Virgin Pulse. HR software has long been a PE favorite – but it’s also attracting the interest of buyout firms that are less experienced in software as many of these businesses have a strong services component. Last year, 49% of such targets were bought by PE shops, compared with just 25% at the start of the decade. (For context, our data shows that roughly one-third of all software providers were acquired by PE firms last year.)

Hellman & Friedman, which is leading the syndicate that’s buying Ultimate Software, is neither new to software or HR. It acquired Kronos, a maker of HR software mainly used by organizations with hourly employees, back in 2007, paying 3x. That’s not to say prevailing prices have tripled or quadrupled in the time between those two transactions by the tech-focused PE shop. For one, Kronos began its transition to SaaS only a few years ago, whereas Ultimate’s revenue is overwhelmingly SaaS.

The market has changed in that time as well. When Hellman & Friedman bought Kronos, HR software – like many categories of business applications – functioned as a record-keeping and workflow tool. While that’s still true today, we find that more companies are turning to HR software and the data it contains for strategic insights. According to 451 Research’s Voice of the Enterprise: Data & Analytics, 28% of businesses run analytics on their employee behavior data, roughly the same number that analyze IT infrastructure data.

A pause in Big Software’s ‘SaaS grab’

Contact: Brenon Daly

After years of trying to leap directly to the cloud through blockbuster acquisitions, major software vendors have been taking a more step-by-step approach lately. That’s shown up clearly in the M&A bills for two of the biggest shops from the previous era trying to make the transition to Software 2.0: Oracle and SAP.

Since the start of the current decade, the duo has done 11 SaaS purchases valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. However, not one of those deals has come in the past 14 months, as the two companies have largely focused on the implications of their earlier ‘SaaS grab.’

During their previous shopping spree for subscription-based software providers, Oracle and SAP collectively bought their way into virtually every significant market for enterprise applications: ERP, expense management, marketing automation, HR management, CRM, supply chain management and elsewhere. All of the transactions appeared designed to simply get the middle-aged companies bulk in cloud revenue, with Oracle and SAP paying up for the privilege. In almost half of their SaaS acquisitions, Oracle and SAP paid double-digit multiples, handing out valuations for subscription-based firms that were twice as rich as their own.

In addition to the comparatively high upfront cost of the SaaS targets, old-line software companies face particular challenges on integrating SaaS vendors as part of a larger, multiyear shift to subscription delivery models. Like a transplanted organ in the human body, the changes caused by an acquired company inside the host company tend to show up throughout the organization, with software engineers re-platforming some of the previously stand-alone technology and sales reps having their compensation plans completely overhauled.

The disruption inherent in bringing together two fundamentally incompatible software business models shows up even though the acquired SaaS providers typically measure their sales in the hundreds of millions of dollars, while SAP and Oracle both measure their sales in the tens of billions of dollars.

For instance, SAP is currently posting declining margins, an unusual position for a mature software vendor that would typically look to run more – not less – financially efficient. But, as the 45-year-old software giant has clearly communicated, the temporary margin compression is a short-term cost the company has to absorb as it transitions from a provider of on-premises software to the cloud.

Of course, the transition by software suppliers such as Oracle and SAP – painful and expensive though it may be – simply reflects the increasing appetite for SaaS among software buyers. In a series of surveys of several hundred IT decision-makers, 451 Research’s Voice of the Enterprise found that 15% of application workloads are running as SaaS right now. More importantly, the respondents forecast that level will top 21% of workloads by 2019, with all of the growth coming at the expense of legacy non-cloud environments. That’s a shift that will likely swing tens of billions of dollars of software spending in the coming years, and could very well have a similar impact on the market capitalization of the software vendors themselves.

ServiceNow adds some smarts to the platform with DxContinuum

Contact: Brenon Daly

Continuing its M&A strategy of bolting on technology to its core platform, ServiceNow has reached for predictive software startup DxContinuum. Terms of the deal, which is expected to close later this month, weren’t announced. DxContinuum had taken in only one round of funding, and appears to have focused its products primarily on predictive analytics for sales and marketing. ServiceNow indicated that it plans to roll the technology, which it described as ‘intelligent automation,’ across its products with the goal of processing requests more efficiently.

Originally founded as a SaaS-based provider of IT service management, ServiceNow has expanded its platform into other technology markets including HR software, information security and customer service. Most of that expansion has been done organically. ServiceNow spends more than $70m per quarter, or roughly 20% of revenue, on R&D.

In addition, it has acquired four companies, including DxContinuum, over the past two years, according to 451 Research’s M&A KnowledgeBase. However, all four of those acquisitions have been small deals involving startups that are five years old or younger. ServiceNow has paid less than $20m for each of its three previous purchases. The vendor plans to discuss more of the specifics about its DxContinuum buy when it reports earnings next Wednesday.

ServiceNow’s reach for DxContinuum comes amid a boom time for machine-learning M&A. We recently noted that the number of transactions in this emerging sector set a record in 2016, with deal volume soaring 60% from the previous year. Further, the senior investment bankers we surveyed last month picked machine learning as the top M&A theme for 2017. More than eight out of 10 respondents (82%) to the 451 Research Tech Banking Outlook Survey predicted an uptick in machine-learning M&A activity, outpacing the predictions for acquisitions in all individual technology markets as well as the other four cross-market themes of the Internet of Things, big data, cloud computing and converged IT.

Concur is just the latest of SAP’s pricey plays in the cloud

Contact: Brenon Daly

Announcing the largest SaaS acquisition in history, SAP will pay $8.3bn for travel and expense management software provider Concur Technologies. The purchase comes as the German giant is on the hook for doubling its cloud revenue in 2015 – a corporate target that has driven SAP’s recent M&A.

In its 42-year history, SAP has announced seven acquisitions valued at $1bn or more, according to The 451 M&A KnowledgeBase . However, the five most recent deals have all been pickups of subscription-based software vendors. (SAP’s two consolidation plays for firms hawking software licenses came in 2007 and 2010, with Business Objects and Sybase, respectively.) The purchase of Concur is the Germany company’s largest acquisition, and the fifth-largest transaction in the software market overall.

More significantly, SAP is paying up as it tries to move to the cloud. Including the Concur buy, SAP has handed out a lavish multiple, on average, of 11x trailing revenue to its SaaS targets. (Obviously, revenue doesn’t fully reflect the economic value of multiyear contracts common at SaaS firms. But even on a more liberal measure of business activity such as bookings, SAP has paid double-digit multiples in its subscription-based acquisitions.)

The SaaS premium stands out even more when compared with the valuations SAP has paid for conventional license-based vendors. The purchases of both Business Objects and Sybase went off at slightly less than 5x trailing revenue, or half the average SaaS valuation. Further, SAP itself trades at less than half the valuation it has paid for its SaaS acquisitions.

SAP acquisitions, $1bn+

Date announced Target Software delivery model Deal value Price/revenue multiple
September 18, 2014 Concur Technologies Subscription $8.3bn 12.4
October 7, 2007 Business Objects License $6.8bn 4.7
May 12, 2010 Sybase License $6.1bn 4.8
May 22, 2012 Ariba Subscription $4.5bn 8.6
December 3, 2011 SuccessFactors Subscription $3.6bn 11.7
June 5, 2013 hybris Subscription $1.3bn 10.7*
March 26, 2014 Fieldglass Subscription $1bn* 11.8*

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

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A highly remunerative Workday

Contact: Brenon Daly

Apparently, the third time is the charm for second-chancers. Workday became the third significant tech IPO in 2012 headed by executives who previously ran similar companies in the Internet 1.0 era. And while each of the other ‘redo’ companies (ServiceNow and Palo Alto Networks) have created more than $4bn of market value since their IPOs last summer, Workday soared past that level. In fact, on a fully diluted basis, the human capital management vendor is valued at more than the two other earlier IPOs combined.

In its offering, Workday priced its 22.8 million shares at $28 each, raising an eye-popping $638m. That’s a mountain of money, roughly three times more than most other ‘big’ tech IPOs raise. But that was just the start for the company, which was founded in 2005 by executives from PeopleSoft after that ERP veteran was acquired by Oracle.

Once trading began on Friday, the stock continued to move higher, changing hands at $47 late in the session. With about 160 million shares outstanding (on a non-diluted basis), Workday is being valued at $7.5bn. That works out to 30 times this year’s expected sales of about $250m. For an indication of just how rich that is, consider that PeopleSoft garnered just 4x sales when it was snapped up in 2005. Or another way to look at the price: Workday is commanding three-quarters of the valuation of PeopleSoft while only putting up one-tenth the sales of the first-generation version.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

Lithium buys partner Social Dynamx for social support

Contact: Martin Schneider, Ben Kolada

Social marketing and customer support vendor Lithium Technologies announced on Tuesday the acquisition of its young partner, Social Dynamx. In January, Lithium secured a $53m series D funding round (bringing total funding to $101m) and said it planned to use the funds for product development and hiring. Apparently, this acquisition serves a bit of both of those goals.

Terms of the deal weren’t disclosed, though we suspect the consideration was a small amount of cash and stock. Austin, Texas-based Social Dynamx employs about 25 people, and all regular employees are expected to join Lithium. The companies had been tightlipped about their partnership, though we did uncover the relationship and provide more detail in a report we published in May.

Lithium is doing a couple of things here with its pickup of Social Dynamx. First, the company has been looking to move from internal, community-based support models for some time. While Lithium did partner with Social Dynamx, and the Social Dynamx offering powers the Lithium Response social support tool, owning the product outright can lead to deeper, more process-driven integrations around externally sourced support requests. For example, a deeper integration can allow the tool to identify ‘calls for help’ in social channels outside of Lithium’s communities, such as Twitter, and pull that individual (and his question or issue) into either a structured agent-assisted channel or a community-based support network. The notion is to deeply embed the ability to identify and scale cross-platform support requests into the Lithium platform.

Secondly, the move to acquire seems somewhat defensive. As competitors like Jive Software look to move from internal social collaboration into other areas like marketing and support (like Lithium has been doing over the past several quarters), this acquisition knocks out a potential agnostic partner for other social players. Lithium not only adds features, but also takes an easier route to wresting them away from other enterprise social vendors.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

Oracle adds social-recruiting features through acquisition of SelectMinds

Contact: Thejeswi Venkatesh

The spree of HR software M&A continued on Monday with Oracle announcing the purchase of recruitment SaaS startup SelectMinds. The tuck-in acquisition adds social recruitment features to the core platform Oracle gained via its $2bn pickup of Taleo in February.

In the past few months, the same three firms that consolidated the top end of the BI market a few years ago (SAP, Oracle and IBM) have shifted their buying to the human capital management (HCM) market. Collectively, the trio has spent roughly $7bn on HCM providers. While SAP and IBM got social recruitment tools with their acquisitions of SuccessFactors and Kenexa, respectively, Oracle-Taleo was left with a hole in its portfolio. The reach for SelectMinds is meant to close that gap.

Twelve-year-old SelectMinds provides social media-recruiting SaaS, allowing companies and employees to distribute job openings via social media. The vendor says this targeted approach increases the quality of sourced job candidates. SelectMinds, which only raised $5.5m in venture funding, has marquee customers including eBay, McGraw-Hill, Qualcomm and Visa.

We’d note that the transaction comes barely a week after rival HCM vendor iCIMS announced a similar deal, acquiring its former partner and social media-recruiting firm Jobmagic. All of this points to increasing commoditization of the HCM market, where platform providers have to offer more features to compete effectively.

HCM: When the buyers get bought

Contact: Brenon Daly

One of the knock-on effects of IBM’s purchase of Kenexa is that a whole swath of capable buyers in the densely populated human capital management (HCM) market has now been erased. We noted that Big Blue’s reach for the HCM vendor followed similar acquisitions by SAP and Oracle over the past nine months, pushing the collective value of the three deals to nearly $7bn.

The acquisitions of Kenexa, SuccessFactors and Taleo effectively take them out of the M&A market. Certainly, they won’t be nearly as active as they had been. Over the past six years, the trio had announced more than 20 transactions with an aggregate deal value of over $1bn. On average, the companies tended to buy about a company each year, adding technology in markets adjacent to core HR functions such as learning management, workplace collaboration and compensation. (For its part, Kenexa has been the most-active acquirer of the three HCM players in recent years.)

In addition to having demonstrated the institutional appetite for acquisitions, the three companies also had the money to do them. Collectively, Kenexa, Taleo and SuccessFactors held more than $400m in their treasuries at the time of their takeout.

And while the remaining publicly traded HCM providers may, likewise, have plenty of cash to go shopping, not one of them has been anywhere near as active as their three rivals that have been snapped up. In fact, if we look at the M&A activity of the next three HCM midcap vendors we see that they have spent, collectively, less than $100m – or less than one-tenth the amount spent by the trio of now-acquired HCM firms.

Saba Software has done just one deal this year, after being out of the market entirely since 2005. Cornerstone OnDemand has only announced a single transaction (a $14m acquisition earlier this year) and Ultimate Software hasn’t printed anything since a $6m purchase in 2006. And a company executive recently indicated at the Canaccord Genuity tech conference that Ultimate didn’t expect to do any deals – certainly nothing sizeable – in the coming months.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

Another market, another wave of multibillion-dollar M&A

by Brenon Daly

A half-decade ago, tech giants SAP, Oracle and IBM went on a $15bn shopping spree that essentially consolidated the upper end of the business intelligence (BI) market. Now, the trio has done the same thing in another slice of the application software space, human capital management (HCM). On Monday, Big Blue joined the other two vendors with a billion-dollar HCM purchase of its own, paying $1.3bn for Kenexa.

Formerly a company that didn’t acquire application software providers, IBM nonetheless is set to hand over $46 for each share of Kenexa. (IBM valued the transaction at $1.3bn on a ‘net’ basis, which would exclude the roughly $50m in net cash that Kenexa held.) With its HCM acquisition, IBM follows SAP’s $3.6bn purchase of SuccessFactors last December and Oracle’s $2bn reach for Taleo last February.

IBM’s acquisition brings the trio’s total HCM spending on the deals to about $6.9bn – less than half the amount the three vendors paid in the consolidation of the BI market. However, the valuations paid for the flurry of HCM transactions have been significantly richer, ranging from 4-11.7 times trailing sales. For comparison, the BI deals went off at range of 3.7-5x trailing sales. Interestingly, in each of the consolidation waves, the last of the three transactions in the sectors garnered the lowest multiple: Kenexa at 4x sales and Hyperion Solutions at 3.7x sales.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

TriNet expands with ExpenseCloud

Contact: Brenon Daly

Throughout its history, TriNet Group has been a slow but steady consolidator. Perhaps the best-known play by the outsourced HR provider came three years ago, when it gobbled up publicly traded rival Gevity HR for $99m. In its most recent deal, however, the private equity-backed buyer has shifted gears a bit.

Rather than simply add more accounts through an acquisition, TriNet has added a nifty offering to its portfolio. The company recently picked up three-year-old startup ExpenseCloud, which helps automate the process around creating and reimbursing employee expenses. TriNet says the expense management offering will be available on its platform later this year.

Although, candidly, employee expense management sounds like a ho-hum market, the big player in this space – publicly traded Concur Technologies – has shown it can be a wildly valued one. The company’s shares currently change hands at their highest-ever level, putting its market valuation at a whopping $3.4bn. Concur recently projected that sales for its current fiscal year, which ends in September, would be in the neighborhood of $440m, meaning investors are valuing the company at 7.6 times this year’s projected sales.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.