SuccessFactors pays a peak price for Plateau

Contact: Brenon Daly

Plateau Systems certainly got a peak price from SuccessFactors. At $290m, the cash-and-stock acquisition is the largest purchase of a privately held human capital management (HCM) vendor. In fact, the pending purchase of Plateau is larger than a half-dozen acquisitions of public HCM companies we have recorded in recent years.

Similarly, the deal – which is roughly three times more than SuccessFactors had spent, collectively, on M&A – also stands out when compared to the two most-significant transactions in the learning management software (LMS) market where Plateau does its business.

Earlier this year, private equity-backed SumTotal Systems paid an estimated $150m for GeoLearning while a half-year ago, SuccessFactors’ direct rival Taleo handed over $125m for Just as those two deals have a lower aggregate price than Plateau’s price, publicly traded LMS vendor Saba Software actually garners a lower valuation on the market ($270m) than Plateau is set to receive in its sale.

Apax goes double or nothing in big software bet

Contact: Brenon Daly

Apax Partners is going double or nothing in the latest addition to its software portfolio. The buyout firm plans to spend a total of $2bn to put together a pair of old-line ERP vendors, Epicor Software and Activant Solutions. And it is very much a ‘paired’ deal. In fact, according to terms, Apax closing its Activant purchase is a precondition of its planned take-private of Epicor.

That said, neither Apax’s purchase of Activant from its current private equity (PE) owners nor the buyout of Epicor should present much of a problem to get closed this quarter. But it does underline the necessity of cost ‘synergies’ in a deal (or in this case, two) for a mature company. (We noted that fact in the very similar proposed take-private of Lawson Software.)

If the double-barreled deals go through (as we assume they will), it would mark the end of a two-and-a-half-year effort by Elliott Associates to get Epicor sold. The hedge fund accumulated a 10% stake in Epicor in 2008 and then floated an offer of $9.50 for each remaining share of Epicor. It later trimmed that to $7.50 per share as the software company’s outlook deteriorated. (Epicor’s total revenue dropped 16% in 2009, and sales in 2011, while expected to increase, are still forecasted to come in below the level of 2008.) Apax is set to pay $12.50 per share for Epicor – an offer that Elliot has signed off on.

Lawson ‘Infor-med’ of unsolicited offer

Contact: Brenon Daly

In the middle of last year, we penciled out a takeout scenario for Lawson Software that gave the old-line maker of ERP software an equity value of about $1.7bn. Turns out we were off by just $100m. On Friday, the acquisitive, private equity-backed rollup machine Infor Global Solutions floated an unsolicited $1.8bn offer for Lawson. The target said only that it has retained Barclays Capital to advise it on the process.

We thought Lawson might find itself in play because activist shareholder Carl Icahn had taken about 10% of the company’s stock and started talking about ‘maximizing shareholder value.’ (Some of that has already showed up in Lawson’s recent stock chart. When Icahn revealed his stake last summer, shares were changing hands at about $8 each, compared to the $11.25 offer from Infor. We would note that the stock traded through the bid on Monday, hitting a high of $12.87 before settling down at about $12.25 in afternoon activity.)

In many ways, Lawson presents something of an easy target for Icahn and the would-be buyout group. License revenue has slipped in both of the company’s quarters so far this fiscal year. Meanwhile, it has been deemphasizing its consulting services, which is still one-third of total sales. So that business is dropping, too. The only growth has been seen in Lawson’s maintenance revenue. That business runs at an 80% gross margin, one of the main reasons Lawson generates so much cash.

Over the past four quarters, Lawson has thrown off some $116m of EBITDA on $745m of sales, a healthy 16% margin. If we put that trailing performance against Infor’s bid, Lawson is garnering a not-too-shabby multiple: 2.4 times sales and 15x EBITDA. Infor’s bid represents the highest price for Lawson stock in nine years, and would be CEO Charles Philips’ first deal since coming over from Oracle last October.

Looking at Lawson

Contact: Brenon Daly

What was shaping up as an explosive showdown between Carl Icahn and Genzyme has been defused ahead of today’s board meeting at the biotech company. By adding two nominees selected by Icahn to the expanded board of directors, Genzyme avoided the full-blown proxy fight that had been brewing. With that matter settled, we wonder if Icahn will turn his attention to his newest tech investment – Lawson Software.

The gadfly investor owns stock and options equaling about 15.6 million Lawson shares, or roughly 9.7% of the old-line ERP vendor. As is often the case in his investments, Icahn says he will push for moves that maximize shareholder value, which could include a sale of the company. However, we would note that in his recent role as shareholder activist, Icahn hasn’t succeeded in putting his holdings in play.

Although he helped spur the sale of BEA Systems in early 2008, his more recent agitation hasn’t necessarily resulted in M&A. Among other holdings, Icahn has owned or currently owns stakes in Yahoo, Motorola and Mentor Graphics – all of which still trade on their own. Likewise, we suspect Lawson will remain independent, even if Icahn pushes for a sale.

For starters, the company isn’t cheap. Shares have tacked on 60% over the past year – twice the return of the Nasdaq and three times the gain of Oracle over the same period. That gives Lawson a market capitalization of $1.3bn. (It holds roughly the same amount of cash and debt, so Lawson’s enterprise value is also about $1.3bn.)

If we assume the company will generate about $350m in maintenance revenue in its current fiscal year, Lawson currently trades at 3.7 times its maintenance revenue. A conservative 30% premium on top of Lawson’s current valuation would add $400m to the price, for a total cost of $1.7bn or nearly 5 times maintenance revenue. That valuation isn’t overly rich, but it is probably at the high end of the range that a financial-minded buyer could make work.

CDC Software’s rollup is rolling along

Contact: Brenon Daly

Since being spun off from its parent company less than a year ago, CDC Software has been rolling along with its planned rollup. It has done a half-dozen acquisitions of small, on-demand software companies to help expand its portfolio of ERP, CRM and supply chain management offerings. (It got bigger eyes earlier this year, when it made a short-lived run at fellow public company Chordiant Software.) In general, the technology has come from startups that have been passed over by the market. That’s certainly the case in CDC Software’s latest – and largest – acquisition, the purchase of TradeBeam last week.

Ten-year-old TradeBeam had burned through a mountain of venture backing and had snatched up the assets of three other vendors, but had struggled to actually build its business. (We understand that the company generated only about $9m in recurring revenue in 2009, and that projections for this year called for $10m in recurring revenue. That got the target around $20m in its sale to CDC Software, according to our understanding.)

Still, TradeBeam was able to develop some fairly useful software, thanks to its generous VC subsidy, that should fit well inside CDC Software. The company had two main product lines, which each accounted for about half of overall sales. TradeBeam sold global trade management software, which helps customers handle regulatory compliance and other aspects of the import/export business, as well as supply chain visibility, which provides additional capabilities around forecasting and collaboration with suppliers.

CDC Software’s recent acquisitions are part of a larger plan to slowly but steadily transition its business from selling software licenses to ‘renting’ software through a subscription model. Recurring revenue will still be a small slice of the overall $220m or so of revenue that the vendor is expected to put up this year. But if CDC Software can pull off its SaaS rollup strategy – and couple that with even a smidgen of organic growth – it could very well see a bump in its valuation. The transition to SaaS has certainly put a shine on the valuation of Concur Technologies and, to a lesser extent, Ariba. For its part, CDC Software, which is still majority owned by CDC Corp, trades at basically 1 times sales and 4x EBITDA.

Plenty of capital for Human Capital Management buyers

Contact: Brenon Daly

For the fragmented market segment called human capital management (HCM), we’d put the emphasis on ‘capital.’ Both of the two largest public HCM vendors (Taleo and SuccessFactors) have done secondaries in recent months, despite already having pretty fat treasuries. Taleo, which held some $77m in cash at the end of the most recent quarter, sold more than $130m worth of stock in late November. That offering came a month after rival SuccessFactors, which held $122m in cash, raised some $215m in its secondary.

Despite all the cash, neither player has been particularly concerned with using it to go shopping. SuccessFactors has never bought a company while Taleo has inked just one deal in each of the past two years. In May 2008, Taleo consolidated rival Vurv Technology for $128.8m in cash and stock. Last September, it spent $16m in cash for startup Worldwide Compensation, an acquisition that followed an initial early investment in the compensation management vendor. We have noted for some time that both SuccessFactors and Taleo are likely to be busy, and in fact, we heard gossip that SuccessFactors came very close to closing a deal at the end of 2009, but it fell through.

We were thinking about all this potential M&A last week, when one of the HCM rollups got rolling. Authoria, which is owned by buyout firm Bedford Funding, announced its first deal since it got snapped up in September 2008. We estimate that the $100m purchase of Peopleclick will more than double Authoria’s revenue. Not that the deal tapped out Authoria’s bank account, either. It still has some $700m to spend. Adding up the money the would-be buyers (both financial and strategic) have to shop in this market, we expect HCM deals to follow in 2010.

Chordiant: hunter turns hunted

Contact: Brenon Daly

Just a month ago, Chordiant Software was a hunter. Now it’s the hunted. The call-center software vendor attracted an unsolicited – and rather unsatisfying – offer from CDC Software earlier this week. The unusual twist is just the latest development in the already unusual process around the sale of fellow software company Kana Software. Recall that Chordiant, after failing to land Kana, took to sniping at the deal as an activist shareholder. None of that had any impact, as the sale of Kana to midmarket buyout firm Accel-KKR closed in late December.

Chordiant’s unsuccessful bid for Kana came up in CDC’s rationale for making what it terms a ‘proactive’ offer for Chordiant, with acquisitive CDC saying the bid was partly driven by Chordiant’s recognition that it was a ‘sub-scale’ software company. And recently, Chordiant has been falling even further away from being a software vendor of scale. In its most recent fiscal year, which ended September 30, overall revenue dropped by one-third. Granted, that fiscal year covered one of the most difficult economic periods since the Great Depression. But even in the current fiscal year, most Wall Street analysts don’t project that Chordiant will grow much, if at all.

So what does all that mean for Chordiant, which has remained silent to this point on CDC’s offer of $105m in cash and stock? We suspect it’ll probably play out similarly to CDC’s bid in 2006 for another CRM provider, Onyx Software. In that would-be acquisition, CDC was also an unwelcome bidder for Onyx, and the process unfolded fitfully. (Onyx ultimately sold to rollup Consona.) Not that we’re saying CDC will necessarily pull its bid for Chordiant, as it did for Onyx.

Instead, on the other side, we suspect Chordiant will try everything in its power not to end up inside CDC. One key defense: Chordiant has a poison pill in place that doesn’t expire until mid-2011. Also, Chordiant shares are currently changing hands above CDC’s offer of $3.46 for each of them. So if CDC, which is planning to hit the road next week to help sell Chordiant investors on the deal, really wants to add Chordiant’s front-office products to its existing back-office wares, we think it’ll have to present a topping bid. On a call discussing the proposed transaction Friday, CDC chief executive Peter Yip said he’s ‘open minded’ to raising the offer.

Hedge fund goes tender on Epicor

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.

Epicor: Thanks, but no thanks

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.


-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