Category: Human Capital Management

Will Taleo exercise its M&A option?

Brenon Daly

Contact: Brenon Daly

Having crossed the anniversary of its acquisition of Vurv Technology earlier this summer, Taleo recently indicated that it is looking to return to the M&A market. (Shares of the human capital management vendor trade essentially where they did when the company closed its $128m consolidation play with Vurv, while the Nasdaq is down about 12% over that same period.) Taleo’s pickup of Vurv was its largest-ever transaction, roughly doubling the number of customers for the company. The success that Taleo has enjoyed with migrating Vurv users to its own platform stands in sharp contrast to the other main consolidation play by a publicly traded rival, Kenexa’s $115m reach for BrassRing in 2006.

If we had to speculate on Taleo’s next M&A move, we suspect it would involve exercising a kind of ‘call option’ that it has on a startup. What do we mean by that? Last summer, when Taleo had its hands full with Vurv, it also made a $2.5m equity investment in a Redwood City, California-based startup called Worldwide Compensation (WWC). So rather than take on another acquisition immediately, Taleo smartly structured its investment – its only such investment – to give it right of first refusal to pick up all of WWC at any time through the end of 2009.

The investment in WWC comes with a partnership that adds WWC’s compensation management offering to Taleo’s core performance management products. In the second quarter, Taleo reported that it had three joint deals with WWC involving enterprise customers. As pay-for-performance offerings get more widely adopted, we could certainly imagine a case where Taleo would want to bring WWC in-house. In that regard, we might view the WWC investment as just a ‘try before you buy’ arrangement for Taleo.

Bargains for SuccessFactors

Brenon Daly

Contact: Brenon Daly

Having organically built an on-demand business that cracked $100m in sales last year, SuccessFactors may be ready to do a bit of shopping. The switch comes a year after the human capital management (HCM) vendor told us that despite the company’s close ties to Jack Welch, it didn’t expect to do deals like the former General Electric chief executive.

But as valuations of smaller HCM players have been slashed, there may be some bargains out there that are too good to pass up, CFO Bruce Felt said recently. He added that the company has some $70m in cash and $33m in short-term investments. And in the fourth quarter of 2008, SuccessFactors generated operating cash flow for the first time, and the company indicated that would continue in 2009.

SuccessFactors would be looking to pick up technology, rather than make a large-scale consolidation move. (We would note that neither of the recent consolidation moves in the HCM market, Taleo’s $128.8m purchase of rival Vurv Technology and Kenexa’s $115m acquisition of BrassRing, has gone particularly well.) While SuccessFactors says it’s in the market, the company isn’t counting on deals to continue to boost its top line. It recently forecast 30% organic growth for this year. While that’s less than half as fast as it grew in 2008, it’s a pretty healthy clip during a recession.

‘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

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