Tag: SFSF

A December rebound in tech M&A

Brenon Daly

Contact: Brenon Daly

After three months of basically standing on the sidelines, tech dealmakers have stepped back into the market in a big way in December. During just the first week of the final month of 2011, the value of announced transactions across the globe hit $8.6bn, led by SAP’s announcement of the largest-ever SaaS deal with its $3.6bn purchase of SuccessFactors and Verizon’s mammoth $3.6bn reach for some excess wireless spectrum with its pickup of SpectrumCo.

To put that $8.6bn of deal value in December into context, consider this: it already equals the full-month total for September and is fully twice the amount of spending in November. But then, last month was particularly grim for M&A. In fact, spending in November sank to its lowest monthly level in more than two and a half years, which was the depths of the Great Recession. Further, the number of transactions in November (only 240) stands as the lowest of any month so far in 2011 and is roughly 20% below the typical monthly volume.

SuccessFactors works the other side of the deal

Brenon Daly

Contact: Brenon Daly

In one of the quickest M&A turnarounds, SuccessFactors has gone from a seller to a buyer in just a matter of days. The human capital management (HCM) vendor announced over the weekend that it would be selling itself to SAP for $3.4bn in cash, the largest-ever SaaS deal. The ink was hardly dry on that transaction when SuccessFactors said on Tuesday that it will hand over $110m for Jobs2Web, a recruiting marketing platform with about 150 customers. (For the record, the mammoth SAP-SuccessFactors pairing is expected to close in the first quarter of 2012, while SuccessFactors’ purchase of the Minnesota-based startup should be done by the end of the year.)

The addition of Jobs2Web makes a great deal of sense for SuccessFactors, and in some ways, it shares some similarities to another deal earlier this year – salesforce.com’s $326m pickup of Radian6. In both cases, the startups added technology around mining social media sources and powerful analytics to expand the acquirer’s existing product portfolio.

There are even more similarities between Jobs2Web and Radian6, besides simply having numerals in their names. Both startups were founded far from any of the typical launch pads for tech companies. Jobs2Web has its headquarters in Minnetonka, Minnesota, while Radian6 was in the even more remote location of Fredericton, Canada.

But more importantly, both targets were incredibly capital efficient, each raising about $5m in VC on their way to a solidly valued exit. (Updata Partners was the sole institutional backer for Jobs2Web, which was advised in its sale by Raymond James & Associates.) According to our understanding, Jobs2Web garnered a valuation of roughly 6 times sales in its sale, while Radian6 was valued north of that.

SAP looks to SuccessFactors for success in the cloud

Brenon Daly

Contact: Brenon Daly

After struggling for years to build its own on-demand offering, SAP plans to buy its way into cloud-based software, handing over $3.65bn for SuccessFactors in what would be the largest-ever SaaS acquisition. The deal combines the largest ERP vendor, which has some 500 million users, with the fast-growing human capital management (HCM) provider. However, the acquisition, which is slated to close in the first quarter of next year, does face some challenges. J.P. Morgan Securities advised SAP on the transaction, while Morgan Stanley banked SuccessFactors, after leading its IPO four years ago.

SAP, which is 30 years older than SuccessFactors, has consistently pulled back the targets for its Business ByDesign SaaS suite since it started talking about it a half-decade ago. The difficulty in moving more quickly into a subscription-based software model is underscored by the fact that even after it drops $3.65bn to make SuccessFactors its cloud-based HCM product, SAP will continue to sell its own existing on-premises talent management offering. In fairness, we had our doubts about SAP’s previous big deal – the $6.1bn purchase of Sybase in mid-2010, which thrust the German giant into a host of new markets, including mobility and databases – but the early returns from that combination have been fairly solid.

However, when we compare SAP’s two most recent significant acquisitions, we can’t help but be struck by one gigantic discrepancy: valuation. SAP is paying a price-to-sales multiple that’s roughly twice as rich for SuccessFactors compared to the one it paid for Sybase. SuccessFactors is projected to do about $330m in sales in 2011, meaning it is garnering a rich 10 times revenue valuation, while Sybase traded at about 5x revenue. Obviously, SuccessFactors’ projected growth of 57% this year goes a long way toward explaining that premium, as does the fact that it’s a subscription-based business with 15 million subscribers. But even when compared with Oracle’s recent purchase of RightNow, which went off at about 6.6x trailing sales, SAP’s move seems pricey. We’ll have a full report on the transaction in tonight’s Daily 451.

SuccessFactors pays a peak price for Plateau

Brenon Daly

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 Learn.com. 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.

Cornerstone: the newest — and priciest — HCM vendor

Brenon Daly

Contact: Brenon Daly

So much for the ‘debut discount.’ Cornerstone OnDemand hit the market Thursday at an eye-popping valuation, going against the recent trend toward conservative pricing for new issues. The human capital management (HCM) vendor priced its shares at $13 each, above the indicated range of $9-11 each. (Goldman Sachs & Co and Barclays Capital are leading the IPO.) By early afternoon Thursday, the stock was changing hands at about $19.

The offering gives Cornerstone one of the richest valuations of any recent IPO. At $19 per share, the company’s market cap is roughly $900m. That’s 15 times trailing bookings (not sales) and likely in the neighborhood of 9x projected bookings. (Our math: Cornerstone reported 2010 bookings of $61m, up 74% from the previous year. Assuming that the growth rate comes down a smidge to 60-65% for 2011, that would put Cornerstone’s full-year bookings at $100m, give or take.)

Cornerstone’s valuation vastly outstrips what the market says rival Taleo is worth, and even puts it ahead of SuccessFactors, which had been the HCM industry’s ‘favorite child.’ (That’s been the view on Wall Street, anyway.) SuccessFactors, which went public in late 2007, currently garners a $2.7bn market cap, roughly 10.5x trailing bookings and about 8x projected 2011 bookings. We should note that both SuccessFactors and Taleo are about four times the size of their newest rival on the public market. But for now, both of them are looking up at Cornerstone.

Laying out a dual track for Conerstone

Brenon Daly

Contact: Brenon Daly

If current IPO candidate Cornerstone OnDemand is looking for a company to model itself on – at least in terms of the offering and after-market trading – it could do a lot worse than SuccessFactors. Both vendors sell human capital management (HCM) software, and both sell it on a subscription basis. Further, both companies were relatively small (sub-$40m in revenue) and running deeply in the red when they put in their paperwork. Not that it has mattered in the case of SuccessFactors. Shares in the company have tripled from the offer price, giving it an eye-popping market valuation of $2.3bn.

Whether Cornerstone will enjoy an equally remarkable run as a public company remains to be seen. (The company, which initially filed in September, would probably be looking at pricing in the first half of next year.) But in a recent report, we wonder if Cornerstone will even make it to the Nasdaq at all. The reason? The M&A market for HCM vendors has been hot lately. Spending on deals in the market so far this year is running at three times the level of both 2008 and 2009. And valuations, for the most part, continue to come in at above-market multiples.

In the report, we speculate on two potential buyers: one that’s obvious (ADP) and one that’s more of a stretch (salesforce.com). Cornerstone has some traits that would clearly appeal to both, as well as some that make a trade sale to either would-be acquirer less likely. ADP, which has already purchased a half-dozen HCM providers, currently has a five-year reselling agreement with Cornerstone, and even holds rights to some warrants in the startup. However, a closer reading of Cornerstone’s prospectus indicates that the early returns from that reselling arrangement haven’t been encouraging, with the two sides feuding over whether or not ADP has hit the agreed-upon sales targets and is, therefore, entitled to warrants that could be worth several million dollars.

Unlike ADP, which has a demonstrated interest in and appetite for HCM deals, salesforce.com is a much more speculative buyer for Cornerstone. But it’s a pairing that is perhaps not as farfetched as it might seem. After all, salesforce.com has long said that it wants to be relevant to all employees at a business, not just to those in sales. Buying Cornerstone would immediately give salesforce.com a high-profile presence in the HCM market, opening up an opportunity that far exceeds its core CRM market. Of course, a major acquisition like this would go against the direction that salesforce.com has taken as an open, all-inclusive platform provider.

Is GeoLearning the next to go?

Brenon Daly

Contact: Brenon Daly

While the employment market may still be sluggish, the market for software that helps companies with their employees is bustling. We recently noted that both the number of deals and spending in the human capital management (HCM) market so far this year is rivaling the records set when the overall M&A market was much healthier. Add to that, there’s even an HCM vendor that’s eyeing the other exit: Cornerstone OnDemand filed to go public two weeks ago, one of the few tech companies that’s willing to brave the chilly IPO market.

As to what’s the next likely deal in the HCM market, recent indications have pointed toward a sale of GeoLearning. (We understand that the Des Moines, Iowa-based company has retained Raymond James & Associates to advise it on a process.) Founded in 1997 by current CEO Frank Russell, GeoLearning sells its learning management software (LMS) through both a hosted and on-demand model to more than 700 customers. In February 2008, GeoLearning took in its first and only institutional money – a $31m investment from Volition Capital, which was known as Fidelity Ventures at the time.

A little more than a month ago, fellow LMS startup Learn.com got snapped up by Taleo for $125m. Sources have indicated that ADP may have been the initial bidder for Learn.com, looking to add to the half-dozen HCM acquisitions the services giant has already done. We would expect ADP to at least look closely at GeoLearning. But from our perspective, the more likely acquirer for GeoLearning is SuccessFactors. The two companies have had an integrated offering on the market for more than four years, and continue as close partners. We gather that GeoLearning is slightly larger than Learn.com, which was running at about $30m in sales.

Plenty of capital for Human Capital Management buyers

Brenon Daly

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.

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.