Tag: HCM

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.

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

Taleo shops with Vurv

Brenon Daly

After sitting out an earlier wave of consolidation of on-demand human capital management (HCM) vendors, Taleo will spend roughly $129m in cash and stock for rival Vurv. The deal would double the number of customers at Taleo. The acquisition values Vurv at roughly 2.8 times trailing revenue, a bit lower than other recent HCM transactions. In mid-2006, three comparable deals got done at roughly 3-5 times trailing revenue and Taleo itself trades at about 3.7 times trailing sales. Since the consolidation wave hit the HCM sector two years ago, we have heard that Vurv was being shopped several times.

However, we would note that Taleo and Vurv have a fair amount of overlapping technology, particularly in the offering around employee recruitment. A similar transaction by the one-time HCM market darling, Kenexa, caused a number of integration headaches, which landed it in the penalty box on Wall Street. Kenexa shares currently change hands about 25% lower than they did in October 2006, when it grabbed ahold of BrassRing for $115m.

Significant HCM deals

Announced Acquirer Target Deal value Target TTM sales
May 2008 Taleo Vurv $129m $45m*
Oct. 2006 Kenexa BrassRing $115m $36m*
Aug. 2006 ADP Employease $160m* $30m*
July 2006 Kronos Unicru $150m $40m*

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